Gustavson Drilling (1964) LTD v. Minister of National Revenue, [1972] CTC 529, 72 DTC 6449

Thurlow, J (others concur):—This is an appeal from a judgment of the Trial Division* [1] which allowed an appeal from a judgment of the Tax Appeal Board (reported [1970] Tax ABC 1137) and restored assessments of income tax for the years 1965, 1966, 1967 and 1968, all of which were made on the basis that the appellant was not entitled to deductions under section 83A of the Income Tax Act in respect of drilling and exploration expenditures which it had made between May 22, 1949 and November 30, 1960.

In the Trial Division the question raised with respect to these deductions was set out in paragraph 12 of the special case on which the appeal was heard as follows:

12. The question for the opinion of the Court is whether subsection (8a) of section 83A of the Income Tax Act as amended by the repeal of paragraphs (c) and (d) thereof by Statutes of Canada, 1962-63, c. 8, section 19, subsections (11) and (15), precludes the Respondent from deducting in the computation of its income for the 1965, 1966, 1967 and 1968 taxation years amounts on account of the drilling and exploration expenses mentioned in paragraph 4 hereof, which but for the repeal would have been deductible by the Respondent under subsections (1) and (3) of section 83A of the Act.

Mr Justice Cattanach answered this question in the affirmative and pronounced judgment accordingly. The only issue in the present appeal is whether he was right in so doing.

As the wording of section 83A is complicated and confusing to anyone not familiar with it I shall not reproduce the section but shall endeavour to summarize the portions that appear to me to bear on the problem raised in the appeal. Subsections (1) and (3) of section 83A as enacted in 1955 provided that a corporation whose principal business was production, refining or marketing of petroleum, petroleum products or natural gas or exploring or drilling for petroleum or natural gas, might deduct, in computing its income under Part I of the Act for a taxation year, certain drilling and exploration expenses incurred by it during the calendar years 1949 to 1952 and subsequently thereto but before the end of the taxation year in question. These provisions were enacted by section 22 of Chapter 55 of the Statutes of Canada, 1955 and were made applicable to the 1955 and subsequent taxation years. An amendment made in 1962 terminated the time for making such expenditures at April 11, 1962. It is common ground that the appellant’s business during the period between May 22, 1949 and November 30, 1960, and the expenditures in question made by it during that period were of the kind referred to in these provisions.

By section 23 of Chapter 39 of the Statutes of Canada, 1956 there was added to section 83A a subsection numbered (8a), which provided that where a corporation (referred to as a successor corporation) whose principal business was production, etc of petroleum, etc had at any time after 1954 acquired from a corporation whose principal business was production, etc of petroleum, etc, all or substantially all of the property of the latter corporation (which is referred to as a predecessor corporation) used by it in carrying on its business:

(c) pursuant to the purchase of such property by the successor corporation in consideration of shares of the capital stock of the successor corporation, or

(d) as a result of the distribution of such property to the successor corporation upon the winding-up of the predecessor corporation subsequently to the purchase of all or substantially all of the shares of the capital stock of the predecessor corporation by the successor corporation in consideration of shares of the capital stock of the successor corporation,

the successor corporation might deduct in computing its income under Part I for a taxation year, as therein set out, the drilling and exploration expenses incurred by the predecessor corporation and that in respect of any such expenses no deduction might be made by the predecessor corporation under section 83A in computing its income for the taxation year in which the property so acquired was acquired by the successor corporation or its income for any subsequent taxation year. This provision was made applicable in respect of property of a corporation acquired after 1954, except that in computing the income of a successor corporation for a taxation year prior to the 1956 taxation year, no amount was deductible under subsection (8a) as so enacted.

On or about November 30, 1960 the Sharpies Oil Corporation, of which the appellant, then known as Sharpies Oil (Canada) Limited, was a wholly owned subsidiary, acquired from the appellant, in consideration for the cancellation of a debt, substantially all the property used by the appellant in carrying on its business and thereafter for several years the appellant was inactive. It is common ground as well that though the principal business of Sharpies Oil Corporation at all material times was the production, etc of petroleum etc as referred to in subsection (8a), the right to make deductions under subsections 83A(1) and (3) in respect of some $2,000,000 theretofore expended by the appellant for drilling or exploration did not accrue to the Sharpies Oil Corporation upon its acquisition of the appellant’s property, but remained with the appellant, since the transaction by which the property was acquired was not of either of the kinds referred to in subsection (8a) of section 83A.

By subsection (11) of section 19 of Chapter 8 of the Statutes of Canada, 1962-63, however, which came into effect on November 29, 1962 and was by subsection (15) made applicable to the 1962 and subsequent taxation years, paragraphs (c) and (d) of subsection (8a) of section 83A, and a further paragraph (da) which had been enacted in 1961, were repealed, thus eliminating any restrictions as to the type of acquisition transactions referred to in the subsection and causing the subsection as so amended to refer by its terms to the acquisition transaction in question.

Thereafter, in March 1963, the Sharpies Oil Corporation went into liquidation and the shares of the appellant were distributed to its shareholders who, in June 1964, sold them to Mikas Oil Co Ltd. In October 1964 the appellant’s name was changed to Gustavson Drilling (1964) Limited and subsequently the company recommenced and carried on as its principal business the production, etc of petroleum, etc, as referred to in section 83A.

In its income tax returns for the taxation years 1965, 1966, 1967 and 1968 the appellant claimed deductions in respect of the $2,000,000 of drilling and exploration expenses incurred by it prior to November 10, 1960, but as previously mentioned these deductions were disallowed by the Minister. An appeal to the Tax Appeal Board from this disallowance was successful but as already mentioned that judgment was reversed by the Trial Division of this Court and the reassessments based on such disallowance were restored.

The submissions put forward in this Court on behalf of the appellant fell under two heads. It was said first that the amendment of 1962, which broadened the scope of subsection (8a) so as to embrace transactions of the kind by which the property of the appellant was acquired by the Sharpies Oil Corporation, should not be construed retrospectively so as to deprive the appellant of a right which had accrued as a result of the incurring of the expenditures or as retrospectively referring to the completed acquisition transaction and giving to it tax consequences which it did not have when made.

In my opinion the effect of the 1962 amendment in question was not retrospective in enacting that in future taxation years* [2] certain new taxation rules should apply, which referred to and were defined by the circumstances and effect of past transactions, that is to say, as applied to this case, the transaction by which the appellant’s property was acquired by the Sharpies Oil Corporation in 1960 — a transaction which in that taxation year involved no tax consequence at all. See R v Inhabitants of St Mary's Whitechapel (1848), 12 QB 120; Master Ladies Tailors Organization v Minister of Labour, [1950] 2 All ER 525; Re A Solicitor Clerk, [1957] 1 WLR 1219, and Maxwell on Interpretation of Statutes, 12th ed, page 217.

On the other hand I am not persuaded that the 1962 amendment is not retrospective in denying the appellant the right, given in 1955 and made applicable to the 1955 and subsequent taxation years, to deduct in subsequent taxation years expenditures which it had made by the end of 1960, and which at that point qualified for deduction by the appellant. However, even if the effect of the 1962 amendment is retrospective in this or other respects, the language of subsection 83(A) (8a) which results from the repeal and removal therefrom of paragraphs (c), (d) and (da) is, in my opinion, such as to make perfectly clear that subsection (8a) as so amended does refer and was intended to refer to situations of the kind here in question. That language includes the wording “has at any time after 1954, acquired” and with this may be coupled the fact that the wording of subsection (6) of sec- tion 23 of chapter 39 of the Statutes of Canada, 1956 made subsection (8a), when originally enacted, retrospectively applicable in respect of property acquired after 1954. The fact that in general a transfer of the right to deduct is contemplated by subsection (8a), rather than an outright destruction of the right, to my mind also tends to weaken the force of any presumption against retrospective operation and in that sense to support the view that subsection (8a) as originally enacted was intended to be capable of operating retrospectively and to have retrospective effect in some situations. I am also of the opinion that the repeal of paragraphs (c), (d) and (da) of subsection (8a), which broadened the application of the subsection and caused it to read as including transactions of the kind here in question by which a corporation “has at any time after 1954, acquired’’, sufficiently shows the intention that the subsection as so broadened should also be read retrospectively, the effect which such a reading would otherwise have with respect to the tax consequences of the transaction in prior years being modified by subsection (15) of the amending section which made subsection (8a), as amended by the repeal of paragraphs (c), (d) and (da), applicable only to the 1962 and subsequent taxation years.

The appellant also relied on paragraphs (b) and (c) of section 35 of the Interpretation Act, RSC 1970, c I-23,* [3] but in my opinion it cannot be said that the repeal of paragraphs (c), (d) and (da) affected their previous operation or anything done or suffered by the appellant thereunder since paragraphs (c), (d) and (da) never had any operation upon or application to anything done or suffered by the appellant. Nor can any right acquired under them be said to have been affected by their repeal, since no right was ever acquired by the appellant under any of them.

Under the other head, as I understood the argument, it was submitted, that to treat the 1962 amendment as making subsection (8a) refer to the transaction in question from the time of the amendment leads to the absurd result that in computing its income for the taxation year 1961 the appellant would have been entitled to a deduction under section 83A, if it had had any income, and that as a result of the amendment the Sharpies Oil Company would also have become entitled to a deduction in computing its income for the 1962 taxation year in respect of the same drilling and exploration expenses.

It was pointed out by Martland, J in Hargal Oils Ltd v MNR, [1965] SCR 291; [1965] CTC 50; 65 DTC 5029, that the wording of subsection

(8a) is complicated and that its meaning is far from clear and for this reason, if for no other, it appears to me that the Court should confine its attention to the problem before it and not attempt the task of resolving or reconciling the results of hypothetical situations that may conceivably arise. Nor do I think such an approach will lead to a solution of the present problem. Rather, in my opinion, the problem must be resolved by a straightforward application of the wording of the subsection to the facts as they have been agreed. If by such an approach the application of the subsection with respect to the appellant is clear, that as I see it is all that requires to be decided in the present appeal.

Approaching the matter in this way, whether or not the result may be to give subsections (8a), as so amended, some retrospective effect on rights which the appellant formerly had, and regardless of what rights if any, may, as a result of the amendment, have been conferred on the successor company in computing its income for taxation years prior to 1962, which it is not necessary to determine, it appears to me to be plain and clear from the language of the subsection that upon the coming into force of Chapter 8 of the Statutes of Canada, 1962-63, which repealed paragraphs (c), (d) and (da) of subsection (8a) and which repeal was made applicable to the 1962 and subsequent taxation years, the appellant became a predecessor corporation and was no longer to have and no longer did have any right arising from drilling and exploration expenditures theretofore made by it to deductions under section 83A for the purpose of computing its income for the 1962 or any subsequent taxation year. That conclusion alone, as I see it, is sufficient to dispose of the appeal and in my opinion it should be dismissed with costs.