Maclean
J.:—This
is
an
appeal
from
a
decision
of
the
Minister
of
National
Revenue
(hereafter
called
"‘the
Minister”)
affirming
an
assessment
made
by
the
Commissioner
of
Income
Tax
upon
the
appellant,
Highwood-Sarcee
Oils
Ltd.,
in
respect
of
income
tax
for
the
taxation
year
1935,
under
the
Income
War
Tax
Act,
R.S.C.
1927,
c.
97.
The
appellant
was
assessed
for
the
said
taxation
period
on
a
taxable
income
of
$30,254.94,
and
the
tax
thereon
was
fixed
at
$4,588.24,
together
with
interest
in
the
sum
of
$350.50,
altogether
$4,888.74.
The
taxable
income
of
the
appellant
was
arrived
at
after
disallowing
certain
amounts
which
the
appellant
claimed
as
deductible
items
in
computing
its
net
income
for
the
year
1935.
The
appellant
in
its
statement
of
claim
raised
certain
points
all
of
which
were
contested
by
the
respondent
in
his
statement
of
defence.
Paragraphs
5,
6
and
7
of
the
statement
of
claim
were
abandoned
at
the
hearing
of
the
appeal
by
counsel
for
the
appellant.
The
subject-matter
of
the
appeal
was
therefore
narrowed
down
to
the
one
question
as
to
whether
the
appellant
was
properly
assessed
as
a
corporation
engaged
in
the
development
of
prospective
oil
properties
in
Western
Canada,
or,
whether
it
should
be
considered
as
‘‘carrying
on
the
business
of
financing
other
concerns
engaged
in
or
interested
in
the
development
of
prospective
oil
properties
and
in
trading
and
dealing
in
oil
lands,
leases,
oil
stocks,
and
other
properties
and
securities,’’
as
alleged
in
para.
3
of
its
statement
of
claim,
and
therefore
allowed
to
set
off
against
profits
any
losses
sustained
as
a
result
of
such
operations.
The
Minister
in
affirming
the
assessment
in
question
did
so
on
the
ground
"'that
the
expenditures
representing
development
prior
to
the
commencing
of
the
1935
accounting
period
and
investments
in
shares
of
and
advances
to
other
companies
and
persons
were
not
expenditures
of
the
taxpayer
wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
its
income,
but
were
in
fact
capital
in
their
nature,
specifically
disallowed
for
income
tax
purposes
under
the
provisions
of
section
6
and
other
provisions
of
the
Income
War
Tax
Act.’’
The
appellant
company
was
incorporated
on
June
7,
1928,
by
letters
patent
issued
by
the
Secretary
of
State
of
Canada.
The
principal
purposes
and
objects
for
which
the
company
was
incorporated
are
set
out
in
para.
1(a)
of
the
letters
patent
and
they.
are
as
follows:
"‘1(a)
to
search
for
and
recover
and
win
from
the
earth
petroleum,
natural
gas,
oil,
salt,
metals,
minerals
and
mineral
substance
of
all
kinds,
and
to
that
end
to
explore,
prospect,
mine,
quarry,
bore,
sink
wells,
construct
works
or
otherwise
proceed
as
may
be
necessary
to
produce,
manufacture,
purchase,
acquire,
refine,
smelt,
store,
distribute,
sell,
dispose
of
and
deal
in
petroleum,
natural
gas,
oil,
salt,
chemicals,
metals,
minerals
and
mineral
substances
of
all
kinds,
and
all
products
of
any
of
the
same,
to
trade
in,
deal
in
and
contract
with
reference
to
lands
and
products
thereof,
or
interests
in
land,
mines,
quarries,
wells,
leases,
privileges,
licenses,
concessions
and
rights
of
all
kinds
covering,
relating
to
or
containing
or
believed
to
cover,
relate
to
or
contain
petroleum,
natural
gas,
oil,
salt,
chemicals,
metals,
minerals
or
mineral
substances
of
any
kind.”
For
the
purpose
of
considering
the
specific
issue
here
raised
it
might
be
well
to
quote
also
para.
3(k)
of
the
letters
patent.
It
reads:
"‘3(k)
To
purchase,
underwrite,
guarantee
the
principal
and
interest
of,
subscribe
for
and
otherwise
acquire
and
hold
and
vote
upon
the
shares,
debentures,
debenture
stock,
bonds
or
obligations
of
any
company
or
of
any
principal,
public
or
other
authority
in
the
Dominion
of
Canada,
the
United
Kingdom
or
elsewhere,
and
upon
a
distribution
of
assets
or
division
of
profits
to
distribute
any
such
shares,
stocks,
bonds
or
obligations
of
any
company
or
of
any
principal,
public
or
other
authority
in
the
Dominion
of
Canada,
the
United
Kingdom
or
elsewhere,
and
upon
a
distribution
of
assets
or
division
of
profits
to
distribute
any
such
shares,
stocks,
bonds
or
obligations
amongst
the
members
of
this
company
in
specie,
and
to
promote
any
company
or
companies,
either
in
the
Dominion
of
Canada,
the
United
Kingdom
or
elsewhere,
for
the
purpose
of
its
or
their
acquiring
all
or
any
of
the
property,
assets,
rights
and
liabilities
of
the
company,
or
for
any
other
purpose
which
may
seem
directly
or
indirectly
calculated
to
benefit
the
company,
and
to
pay
all
or
any
of
the
expenses
in
connection
with
such
promotion.”
The
letters
patent
states
that
‘‘the
capital
stock
of
the
said
company
shall
consist
of
two
million
(2,000,000)
shares
without
nominal
or
par
value,
subject
to
the
increase
of
such
capital
stock
under
the
provisions
of
the
said
Act;
Provided,
however,
that
the
said
shares
may
be
issued
and
allotted
for
such
consideration
as
may
be
determined
from
time
to
time
by
the
Board
of
Directors,
not
exceeding
in
the
aggregate
the
sum
of
two
million
($2,000,000)
dollars
or
its
equivalent.”
The
appellant
began
business
shortly
after
its
incorporation
and
from
time
to
time
acquired
leases
of
oil
lands
in
its
own
name
but
never
drilled
oil
wells
itself
or
developed
such
leases.
The
first
venture
of
the
appellant
was
to
purchase
shares
in
a
company
known
as
Highwood
Petroleum
&
Natural
Gas
Co.
Ltd.,
and
it
might
be
stated
that
later
on
the
appellant
obtained
control
of
this
company.
The
agreement
entered.
into
between
the
appellant
and
this
company
was
evidenced
by
a
written
document,
dated
May
15,
1940.
It
provided
in
el.
1
that:
‘‘The
Old
Company
(Highwood
Petroleum
&
Natural
Gas
Company
Limited},
shall
transfer,
assign,
set
over
and
deliver
to
the
New
Company
(Highwood-Sarcee
Oils
Limited,
the
appellant)
all
its
petroleum
and
natural
gas
leases,
rights
and
concessions
and
all
other
of
its
properties,
rights
and
other
assets
whatsoever
and
wheresoever
situate,
including
all
monies
and
securities
held
by
it
or
to
which
it
is
entitled,
and
the
full
benefit
of
all
contracts
and
engagements
to
which
the
Old
Company
is
or
may
be
entitled.’’
The
consideration
was
the
issue
to
the
Old
Company
of
certain
fully
paid
shares
of
the
capital
stock
of
the
appellant
company
and
the
assumption
by
the
latter
company
of
the
liabilities
of
the
former
company,
as
of
the
date
when
the
agreement
was
approved
by
the
Old
Company.
The
agreement
also
provided
for
the
exchange
by
shareholders
of
the
Old
Company
of
their
shares
in
that
company
for
shares
in
the
appellant
company
on
the
basis
set
out
in
the
agreement.
The
appellant
also
made
an
agreement
with
a
company
known
as
Western
Alberta
Oil
Co.
Ltd.,
as
evidenced
by
a
written
document
dated
April
11,
1980.
This
agreement
was
made
between
Western
Alberta
Oil
Co.
Ltd.
of
the
first
part,
Highwood-Sarcee
Oils
Ltd.
of
the
second
part
(the
appellant
company),
Clark,
Martin
&
Co.
Ltd.
of
the
third
part,
the
William
Martin
Jr.
of
the
fourth
part.
Counsel
for
the
appellant
referred
to
this
agreement
as
a
loaning
agreement
whereby
appellant
loaned
$15,000
to
Western
Alberta
Oil
Co.
Ltd.
It
will
be
well
to
set
forth
the
operative
clauses
of
this
agreement.
After
the
introductory
clauses
have
recited
certain
facts,
and
that
William
Martin
Jr.
held
an
option
from
Western
Alberta
Oil
Co.
Ltd.
to
purchase
from
the
said
company
116,919
shares
of
its
capital
stock,
it
goes
on
to
say
:
"‘Now
therefore
in
consideration
of
the
premises,
and
the
sum
of
$15,000
now
paid
by
Highwood-Sarcee
Oils
Limited
to
Western
Alberta
Oil
Company
Limited,
the
receipt
of
which
sum
is
hereby
acknowledged,
it
is
mutually
agreed
between
the
parties
hereto
as
follows
:—
«(1)
Western
Alberta
Oil
Company
Limited
shall
forthwith
issue
and
deliver
to
Highwood-Sareee
Oils
Limited
50,000
fully
paid
up
shares
of
its
capital
stock,
being
part
of
the
aforesaid
option
held
by
William
Martin,
Jr.,
and
the
said
William
Martin,
Jr.,
hereby
consents
to
the
said
50,000
shares
being
issued,
and
delivered
to
Highwood-Sarcee
Oils
Limited
on
account
of
the
aforesaid
Option,
held
by
him
from
Western
Alberta
Oil
Company
Limited.
«((2)
William
Martin,
Jr.,
covenants
to
and
with
the
Parties
hereto
to
forthwith
pay
to
Western
Alberta
Oil
Company
Limited
the
sum
of
$15,000
in
consideration
of
the
said
Western
Alberta
Oil
Company
Limited
issuing
and
delivering
to
him
50,000
fully
paid
up
shares
of
its
capital
stock,
the
same
being
issued
on
account
of
the
aforesaid
Option.
«((3)
William
Martin,
Jr.,
and
Clark,
Martin
&
Company
Limited
hereby
covenant
with
Highwood-Sarcee
Oils
Limited
that
the
total
liabilities
of
Western
Alberta
Oil
Company
Limited
as
of
this
date
do
not
exceed
the
sum
of
$14,000
and
that
Calgary
&
Edmonton
Corporation
Limited
will
forthwith
issue
to
Western
Alberta
Oil
Company
Limited,
a
Lease
covering
the
Petroleum
and
Natural
Gas
rights
in
the
following
lands
and
premises,
namely,—Legal
Sub-divisions
Eleven
(11)
to
Sixteen
(16),
in
Section
Seven
(7),
Township
Seventeen
(17)
and
Range
Two
(2)
West
of
the
Fifth
Meridian,
and
the
East
Half
of
the
North
East
Quarter
of
Section
Seven
(7)
Township
Sixteen
(16)
and
Range
Two
(2)
West
of
the
Fifth
Meridian,
being
a
total
of
320
acres,
in
form
and
subject
to
conditions
satisfactory
to
Highwood-Sarcee
Oils
Limited.
«(4)
William
Martin,
Jr.,
hereby
gives
to
Highwood-Sarcee
Oils
Limited
an
irrevocable
option
to
purchase
from
him.
50,000
fully
paid
no
par
value
shares
of
Western
Alberta
Oil
Company
Limited
at
the
price
of
thirty
cents
per
share
at
any
time
within
two
months
after
petroleum
or
natural
gas
has
been
struck
in
commercial
quantities
on
any
of
the
aforesaid
land.
«(5)
Western
Alberta
Oil
Company
Limited
covenants
with
Highwood-Sarcee
Oils
Limited
that
Highwood-Sarcee
Oils
Limited
shall
have
the
right
to
appoint
two
of
the
Directors
to
the
Board
of
Western
Alberta
Oil
Company
Limited.
«
(6)
Clark,
Martin
&
Company
Limited
and
William
Martin,
Jr.,
each
covenant
with
Highwood-Sarcee
Oils
Limited
that
on
the
breach
of
any
of
the
covenants
herein
by
any
of
the
Parties
hereto
that
they
will
repay
to
Highwood-Sarcee
Oils
Limited
the
sum
of
$15,000
paid
by
it
to
Western
Alberta
Oil
Company
Limited,
on
delivery
te
either
or
both
of
them
of
50,000
fully
paid
no
par
value
shares
of
Western
Alberta
Oil
Company
Limited.
‘
‘
This
agreement
is
not
a
loan
agreement
at
all.
It
provides
for
the
outright
purchase
of
50,000
shares
of
Western
Alberta
Oil
Co.
Ltd.
by
appellant
for
$15,000
in
cash.
There
was
no
obligation
whatever
for
repayment
to
the
appellant
of
that
amount.
This
was
a
straight
capital
investment
made
by
the
appellant
but
which
turned
out
to
be
a
loss.
Any
attempt,
in
1935,
to
write
off
this
loss
against
income
of
that
year
would
therefore
appear
to
be
wholly
untenable.
The
appellant
also
advanced
the
sum
of
$500
to
a
company
known
as
the
Signal
Hill
Co.
It
also,
in
1933,
bought
shares
in
and
made
advances
to
a
corporation
known
as
Pine
Hill
Petroleum
Ltd.
in
the
aggregate-amount
of
$56,511.28,
and
consequent
upon
this
venture
the
appellant,
in
1933,
also
advanced
to
a
company
known
as
Sheldon
Burden
of
Canada,
Ltd.,
the
sum
of
$2,500.
We
may
now
turn
to
the
appellant’s
balance
sheet,
as
of
June
1935,
and
there
we
find
that
the
appellant
purports
to
write
off
and
deduct
from
revenue
the
investments
made
and
moneys
advanced
by
it
in
some
of
the
ventures
outlined
above,
namely:
Pine
Hill
Petroleum
Ltd.
$56,511.28,
Western
Alberta
Oils
Ltd.
$15,000
and
Sheldon
Burden
of
Canada
$2,500,
altogether
$74,011.28.
The
appellant
takes
the
position,
on
the
ground
I
have
already
explained,
that
it
is
entitled
to
set
off
these
amounts
which
it
considers
as
investment
losses
against
any
revenue
received
by
it
during
the
taxation
year
in
question.
We
may
now
consider
the
source
of
the
appellant’s
revenue
for
the
taxation
period
in
question.
On
July
20,
1933,
a
written
agreement
was
entered
into
between
T.
O.
Renner,
S.
J.
Davies
and
C.
H.
Snyder,
therein
called
"‘the
Operators,’’
of
the
one
part,
and
the
appellant
company,
therein
called
"the
Company,”
of
the
other
part.
This
agreement
may
be
summarized
by
saying
that
the
Company
made
available
to
the
Operators,
upon
terms
and
conditions,
$60,000
for
the
purpose
of
drilling
a
well
on
a
lease
which
the
Operators
had
secured
from
the
trustee
of
a
bankrupt.
The
Company
was
to
be
paid
back
the
said
$60,000
out
of
production
and
to
receive
65%
interest
in
the
well,
its
production
and
equipment.
There
are
clauses
in
the
agreement
providing
for
the
payment
of
prior
charges,
the
termination
of
the
agreement,
and
so
on,
but
these
provisions
are
unimportant.
It
is
to
be
noted
however
that
the
Operators
were
to
assign
to
the
Company
an
undivided
65%
interest
in
the
lease.
This
venture
proved
successful
and
a
producing
well
resulted
which
became
known
as
Highwood-Sarcee
Well
No.
1.
The
lease
also
provided
for
participation
by
the
Operators
and
the
Company
in
drilling
further
wells
if
desired.
The
appellant
company
also
sold
some
of
its
securities
from
time
to
time
and
reinvested
the
proceeds
in
other
bonds
and
securities,
sometimes
profiting
from
the
transactions
and
at
other
times
losing.
It
also
renewed
from
time
to
time
oil
leases
that
it
held,
and
dropped
other
leases
which
it
considered
not
worth
holding
thereby
saving
rental
charges,
all
of
which
would
be
the
usual
course
pursued
by
any
other
company
similarly
situated
or
engaged.
The
appellant
received
according
to
the
evidence
of
the
auditor
of
the
appellant
company,
in
the
taxation
year
1935,
the
sum
of
$60,000,
being
the
amount
advanced
under
the
agreement
with
Renner
et
al.,
and
in
addition
the
sum
of
$10,896.13.
These
amounts,
totalling
$70,896.13
were
received
in
cash
as
the
net
proceeds
of
production
of
the
Highwood-
Sarcee
Well
No.
1.
It
is
against
this
income
that
the
appellant
seeks
to
set
off
the
losses
of
$74,011.28
which
I
have
already
mentioned,
and
the
appellant
had
not
been
in
receipt
of
any
revenue
or
earnings
prior
thereto,
except
for
any
interest
it
had
derived
from
investments.
It
will
be
observed
therefore
that
the
appellant
claims
it
had
sustained
a
deficit
in
its
operation
for
the
taxation
period
in
question.
The
reports
of
the
directors
of
the
appellant
company
to
the
shareholders
thereof
should
be
of
some
significance
here.
The
director’s
report
submitted
to
the
shareholders
at
its
annual
meeting
of
October
27,
1932,
contains
the
following
paragraph:
"‘The
policy
of
your
Directors
has
been
to
keep
in
touch
with
and
carefully
examine
all
likely
oil
development
work
within
the
Province
and
keep
the
expenditures
within
its
income,
so
that
the
capital
of
the
Company
will
not
be
depleted.
Following
this
policy,
examinations
and
investigations
have
been
made
in
connection
with
the
following
areas:
.
.
.
.”
This
report
contains
a
reference
to
an
area
known
as
Two
Pine
structure
and
it
reads
as
follows:
"The
chief
operations
of
the
Company
over
the
past
year
have
been
carried
on
in
this
area.
For
the
purpose
of
assisting
in
intensive
geological
examination
of
the
area
considerable
trenching
and
pit-digging
was
carried
out
in
the
Fall
of
last
year
and
early
Spring
of
this
year.
This
work
was
done
under
the
supervision
of
our
own
Geologist,
Dr.
Willis,
in
co-operation
with
the
Geological
Survey
Staff
of
the
Dominion
Government.
When
this
work
was
completed
Dr.
Willis
prepared
as
complete
a
report
as
he
was
capable
of
from
surface
geology,
but
in
view
of
the
information
obtained
from
the
results
of
the
operations
so
far
carried
forward
at
the
Cotton
Belt,
Elbow
Oils
and
Signal
Hill
Wells,
some
doubt
as
to
proper
interpretation
of
the
structural
conditions
maintained
and
it
was
strongly
recommended
that
we
endeavour
to
arrange
for
a
Seismograph
Survey
to
be
made
of
the
area
under
observation.
This
meant
bringing
a
Seismograph
Survey
party
and
outfit
in
from
the
States.
After
considerable
negotiations,
arrangements
were
made
to
do
this
in
conjunction
with
the
Nordon
Company.
The
Seismograph
Party
is
now
in
the
field
and
the
results
of
their
work
and
report
will
have
a
large
bearing
on
the
immediate
further
work
of
the
Company
in
this
neighborhood.
It
is
hoped
that
arrangements
can
be
made
to
have
this
outfit
make
a
report
on
the
Company’s
holdings
in
the
Highwood
and
Sarcee
Reserve
as
well
as
on
the
Two
Pine,
but
this
will
be
largely
dependent
on
weather
conditions,
and
the
success
of
the
work
as
it
proceeds.
‘
’
The
report
of
the
directors
submitted
at
the
annual
meeting
of
the
shareholders
held
on
October
30,
1933
contains
the
following
:
"‘In
regard
to
the
policy
of
the
Company,
it
will
be
recalled
by
the
shareholders
who
have
followed
the
history
of
the
Company
with
interest,
that
previously
care
had
been
taken
to
conserve
the
liquid
assets
of
the
Company.
Whilst
at
the
same
time
investigating
all
prospects
of
a
promising
nature
in
various
fields
where
tests
for
oil
and
gas
were
either
being
conducted
or
where
there
was
reasonable
promise
of
profitable
operations.
During
the
year
previous
to
the
one
under
review
there
were
many
such
propositions
investigated
and
reported
upon.
It
was
felt,
however,
that
the
time
had
arrived
when
the
Company
should
go
into
activity
and
with
that
in
view,
after
many
further
offerings
had
been
considered
and
analyzed,
your
directors
decided
to
enter
into
agreements
for
two
distinct
enterprises.
"‘One
was
a
proposition
to
become
interested
with
the
lease
owners
of
the
NE.
of
Section
21,
Township
18,
Range
2,
West
of
the
5th
Meridian,
being
in
the
South
end
of
Turner
Valley,
with
the
object
of
drilling
a
well
thereon.
"The
other
was
concerned
with
the
acquisition
of
rights
in
approximately
12,000
acres
in
Southern
Saskatchewan
known
as
the
Dirt
Hills
area
upon
a
structure
which
had
been
surveyed
geologically
by
several
authorities
on
different
occasions
and
highly
recommended.
"The
commitment
of
the
Company
in
connection
with
the
NE.
14
of
Section
21,
in
the
South
end
of
Turner
Valley
is
an
amount
of
$60,000
and
your
directors
see
no
reason
why
this
sum
will
have
to
be
exceeded.
"‘The
commitment
in
connection
with
the
well
at
Avonlea,
Saskatchewan,
will
involve
the
Company
ultimately
in
a
sum
of
from
$30,000
to
$35,000
for
which
the
Company
expects
to
hold
its
present
controlling
interest
in
Pine
Hill
Petroleum
Limited,
the
Company
which
owns
the
well
and
acreage.
In
this
connection
there
is
a
Turnkey
Contract
with
Sheldon
Burden
of
Canada
Limited.
"The
wells
in
both
the
above
areas
are
progressing
satisfactorily
and
a
successful
and
profitable
outcome
is
the
hope
of
your
directors.
The
depth
of
the
well
in
Turner
Valley
on
Saturday
the
28th
inst.
was
1685
ft.,
the
Benton
contact
having
been
passed
at
520
ft.
The
depth
of
the
Saskatchewan
well
was
2217
ft.
on
Saturday,
and
there
have
been
several
showings
of
gas
that
have
been
tested
out
during
the
drilling.
"Your
directors
have
in
view
that,
having
regard
to
the
present
condition
of
the
Company
and
value
of
its
liquid
assets,
the
present
commitments
of
the
Company
will
leave
a
substantial
sum
in
the
treasury.
"‘In
the
report
of
the
directors
last
year
you
were
informed
that
arrangements
had
been
made
in
conjunction
with
the
Nor-
don
Company
to
bring
in
to
this
district
a
Seismograph
Survey
party
and
outfit,
in
order
that
some
testing
by
this
method,
might
be
made
to
confirm
the
findings
of
the
geologists
who
had
previously
gone
over
the
structures
in
which
the
Company
is
interested.
These
arrangements
were
eventually
carried
out
and
reports
were
made
and
data
furnished
by
the
seismograph
party,
which,
so
far
as
the
Southern
Saskatchewan
area
is
concerned,
were
entirely
confirmatory
of
previous
reports
of
geologists,
and
which
furnished
a
substantial
recommendation
for
the
drilling
of
a
test
well
in
the
area
mentioned.
This
may
fairly
be
said
to
have
been
the
deciding
factor
upon
which
your
directors
proceeded
to
make
the
arrangements
for
the
investment
in
the
Dirt
Hills
well
and
acreage.
"
"
With
regard
to
the
Two
Pine
area,
the
Seismograph
Operator
who
was
in
charge
reported
that
the
results
obtained
only
served
to
show
that
his
apparatus
was
not
able
to
furnish
reliable
data
and
results
owing
to
the
peculiarly
faulted
and
disturbed
nature
of
the
strata
in
the
foothills
area.
"‘It
may
be
mentioned
that
a
somewhat
similar
result
was
reported
from
an
attempt
made
by
the
Seismograph
party
to
make
determinations
in
the
Southern
end
of
the
valley.
Your
directors
consider
it
of
the
highest
importance
that
the
tests
made
by
the
Seismograph
Apparatus,
which
is
considered
to
be
the
last
word
in
scientific
sub-surface
surveying,
and
which
has
been
eminently
successful
in
prairie
structures
in
the
United
States
of
America,
was
available
for
use
in
Southern
Saskatchewan
area.’’
The
report
of
the
directors
submitted
at
the
annual
meeting
of
August
22,
1954
contains
the
following:
"‘The
inclusion
in
the
current
assets
of
the
actual
expenditures
on
Highwood-Sarcee
Well
No.
1
naturally
gives
a
very
conservative
value
to
such
current
assets,
and
there
is
no
doubt
that
this
item
is
worth
a
great
deal
more
to
the
Company
than
the
figures
would
suggest.
"‘In
regard
to
development
work
it
is
with
the
utmost
satisfaction
that
your
directors
refer
to
the
successful
completion
of
what
is
known
as
the
Highwood-Sarcee
Well
No.
1
located
on
the
NE.
14
of
Section
21,
Township
18,
Range
2,
West
of
the
oth
Meridian.
This
well
has
now
been
completed
and
is
definitely
ascertained
to
be
capable
of
producing
500
barrels
per
day
of
Naphtha.
The
production
is
being
marketed
under
contract
to
Imperial
Refineries
for
the
present.
In
this
connection
there
are
some
deferred
liabilities
to
be
paid
out
of
production
and
these
will
absorb
the
proceeds
of
the
production
for
several
months
to
come.
Your
Company’s
position,
however,
is
that
it
will
be
repaid
its
outlay
of
approximately
$60,000,
and
will
then
succeed,
to
a
65%
interest
in
the
well
and
equipment
and
the
lease
of
the
quartersection.
This
is
considered
to
be
a
most
favourable
situation,
and
your
directors
have
given
very
close
attention
to
the
whole
of
the
details
over
the
past
year.
Your
Company
is
sensible
of
the
very
able
co-operation
of
its
associates
in
this
venture,
and
particularly
appreciative
of
the
expert
work
of
Mr.
Clarence
Snyder,
who
was
in
charge
of
the
operations
throughout
the
whole
period
of
drilling.
"With
reference
to
the
well
in
Saskatchewan,
this
was
referred
to
in
your
directors’
report
of
last
year
and
the
commitment
in
connection
was
mentioned
as
ranging
from
$30,000
to
$35,000
representing
a
controlling
interest
in
Pine
Hill
Petroleum
Limited,
the
Company
which
owns
the
well
and
controls
approximately
12,000
acres
in
the
vicinity.
There
was
a
turnkey
contract
with
Sheldon-Burden
of
Canada
Limited
you
were
informed.
Unfortunately,
operations
had
to
be
given
up
at
a
late
date
in
1933
owing
to
severe
weather
and
lack
of
water,
and
shortly
afterwards
disaster
overtook
Sheldon-Burden
of
Canada
Limited
of
such
a
nature
that
it
is
scarcely
hoped
the
Company
will
ever
survive.
The
well
on
shutting
down
last
Fall
was
approximately
3000
feet
deep,
and,
as
the
objective
was
4000
feet,
arrangements
have
been
made
for
a
new
contract
with
another
drilling
company
to
complete
the
well.
This
unfortunate
situation
has
been
met
by
your
directors
subscribing
for
a
further
block
of
shares
in
Pine
Hill
Petroleum
Limited.
Work
under
the
new
contract
is
now
in
full
swing.
The
hole
has
been
cleared
out,
and
on
the
morning
of
the
31st
of
July
400
feet
of
new
hole
had
been
drilled,
the
depth
attained
being
3350
feet.
“‘Your
directors
last
year
informed
you
of
an
Agreement
with
Dr.
Robin
Willis
under
which
your
Company
split
several
of
its
leases
in
the
Pekisko
Hills
area
and
made
over
some
acreage
to
Dr.
Willis
on
condition
that
a
well
would
be
drilled
by
him
and
his
associates
to
prove
the
area.
This
situation
resulted
in
operations
by
the
Pekisko
Hills
Company
Limited
which
has
drilled
a
well
on
the
acreage
adjoining
that
assigned
by
your
Company,
so
far
successfully
to
the
extent
that
the
well
has
obtained
a
depth
of
1400
feet
and
is
certified
to
be
in
the
limestone
formation,
with
an
eight
inch
hole.
It
is
understood
that
casing
has
been
cemented
in
the
lime
and
drilling
is
proceeding.
Considerable
gas
is
flowing
from
the
well
and,
according
to
the
anticipation
of
Dr.
Willis
and
his
associates,
it
may
be
reasonably
expected
that
final
success
will
be
achieved
in
the
production
of
oil
or
naphtha
from
the
limestone
in
paying
quantities.
Your
directors
feel
that
in
dealing
with
these
leases
in
the
way
they
have
been
handled,
as
outlined,
the
position
of
your
Company
has
been
considerably
improved
and
strengthened,
and
its
remaining
holdings
in
the
Pekisko
Hills
area
very
much
enhanced
in
value.
"‘Considerable
information
is
furnished
in
the
auditor’s
report
in
regard
to
leases
held
by
your
Company.
After
extensive
negotiation,
arrangements
regarded
by
your
directors
as
being
of
a
favourable
nature
were
made
with
the
Department
at
Ed-
monton.
The
question
of
these
leases
is
engaging
the
earnest
attention
of
your
directors
at
this
time
and
decisions
will
be
shortly
made
as
to
the
surrender
or
retention
of
the
various
leases
held
by
the
Company
as
a
matter
of
policy.
"‘In
regard
to
the
general
policy
of
the
Company,
your
directors
are
continuing
to
investigate
every
proposition
of
consequence
where
tests
for
oil
and
gas
can
be
made
with
fair
promise
of
returns.
In
the
immediate
future
the
policy
of
the
Company
will
be
guided
in
a
great
measure
by
the
outcome
of
the
operations
in
southern
Saskatchewan,
the
facts
on
which
should
be
available
at
a
relatively
early
date.
‘‘
Arrangements
have
been
recently
completed
with
the
Stock
Exchange
in
Toronto
where
Highwood-Sarcee
stock
is
now
listed
for
trading.
An
application
for
similar
privileges
on
the
Vancouver
Stock
Exchange
has
been
recently
submitted
and
it
is
fully
expected
that
as
soon
as
certain
details
have
been
approved,
your
Company’s
stock
will
be
listed
in
that
City.
Arrangements
have
also
been
made
with
the
Toronto
General
Trusts
Corporation
to
act
as
transfer
agents
in
the
Cities
of
Toronto
and
Vancouver,
and
it
is
felt
by
these
measures
that
adequate
facilities
have
been
provided
for
the
convenience
of
shareholders
and
others
in
regard
to
the
purchase
and
sale
of
holdings
in
the
Company.”
Then,
in
the
directors’
annual
report
submitted
to
the
shareholders
at
the
annual
meeting
of
the
company
held
on
October
7,
1935,
we
find
the
following
:
‘‘During
the
year
of
operation
covered
by
the
report
two
outstanding
accomplishments
are
recorded,
the
first
being
the
completion
of
the
well
in
Saskatchewan
by
Pine
Hill
Petroleum
Ltd.,
in
which
concern
your
Company
held
a
controlling
interest,
and
the
second,
the
recovery
of
the
loan,
approximately
$60,000,
made
by
your
Company
to
the
Highwood-Sarcee
Well
No.
1
undertaking
and
the
placing
of
your
Company
in
the
position
of
enjoying
a
majority
interest
in
this
producing
well,
the
drilling
equipment,
and
the
lease
of
the
quarter
section
on
which
the
well
stands.
"
"
The
well
in
Saskatchewan
was
completed
and
abandoned
in
the
Fall
of
last
year
after
every
precaution
had
been
taken
to
exploit
all
its
possibilities.
The
failure
to
find
gas
production
was
a
disappointment
to
your
directors.
Since
that
time
good
gas
production
has
been
found
in
other
parts
of
Saskatchewan
where
perhaps
the
indications
were
not
so
favourable
for
success,
and
certainly
where
geology
did
not
give
so
much
encouragement.
However,
the
business
of
gas
and
oil
prospecting
to
which
your
Company
is
committed.
is
highly
speculative,
and
it
is
refreshing
to
turn
from
the
failure,
and
to
survey
the
brighter
side
of
the
picture.
“The
well
in
Turner
Valley,
since
the
last
report
was
before
you,
has
yielded
so
satisfactorily
that
it
has
paid
off
the
deferred
drilling
charges,
and
by
April
of
this
year,
had
repaid
to
your
Company
the
whole
of
the
cash
advanced
for
drilling
costs,
ete.
Since
that
date
to
the
date
of
the
Auditors’
Report,
revenue
to
the
amount
of
$10,896.18
had
been
brought
into
the
Company’s
treasury
flowing
from
its
interest
in
the
production
from
the
well
.
This
is
shown
in
the
figures
as
‘Deferred
Revenue.
’
High-
wood-Sarcee
Well
No.
1
is
standing
up
reasonably
well
as
a
producer,
subject
to
normal
depletion,
and
your
directors
are
anticipating
a
favourable
future
for
this
well.
‘‘Arrangements
have
recently
been
completed
to
participate
in
the
drilling
of
a
further
well
in
Turner
Valley.
This
new
well
will
be
known
as
Highwood-Sarcee
No.
2,
and
it
will
be
drilled
and
operated
under
similar
conditions
to
those
obtaining
regarding
Well
No.
1.
"An
agreement
has
been
made
with
the
British
American
Oil
Company
Limited
under
which
that
Company
acquires
for
cash,
30%
of
the
Lessee’s
interest
in
the
Well,
and
of
the
remainder
your
Company
will
own
65%,
the
other
35%
being
held
by
the
Company’s
associates
in
No.
1
Well,
which
associates
are
bearing
their
proportion
of
the
cost
of
drilling
the
No.
2
Well.
"Having
carefully
considered
the
position
of
your
Company,
your
Directors
feel
that
the
past
year
can
be
regarded
as
one
of
progress,
and
perhaps
the
most
successful
year
in
the
history
of
the
Company.
At
present
the
recently
arranged
venture
of
drilling
Highwood-Sarcee
Well
No.
2,
gives
the
Company
reasonable
expectation
of
furthing
improving
and
strengthening
its
position.
Looking
to
the
future,
it
would
appear
to
be
good
policy
to
continue
to
develop
along
lines
which
will
keep
the
Company
active
in
the
producing
field,
and
to
take
every
opportunity
of
investigating
new
situations
of
a
promising
nature.”
I
have
already
stated
the
question
for
decision
here,
and
the
opposing
contentions
of
the
parties,
and
that
I
need
not
repeat.
In
all
these
cases
the
initial
difficulty
which
presents
itself
is
that
the
matter
for
decision
is
a
question
of
fact.
As
was
stated
by
the
Lord
Justice
Clerk
in
the
case
of
California
Copper
Syndicate
Ltd.
v.
Harris
(1904),
5
Tax
Cas.
159,
it
is
quite
a
well
settled
principle
in
dealing
with
questions
of
assessment
of
income
tax,
that
where
the
owner
of
an
ordinary
investment
chooses
to
realize
it,
and
obtains
a
greater
price
for
it
than
he
originally
acquired
it
at,
the
enhanced
price
is.
not
profit
assessable
to
income
tax,
and
he
pointed
out
that
it
was
equally
well
established
that
enhanced
values
obtained
from
realization
or
conversion
of
securities
may
be
so
assessable,
where
what
is
done
is
not
merely
a
realization
or
change
of
investment,
but
an
act
done
in
what
is
truly
the
carrying
on,
or
carrying
out,
of
a
business.
The
simplest
case,
the
Lord
Justice
Clerk
stated,
is
that
of
a
person
or
association
of
persons
buying
and
selling
lands
or
securities
speculatively,
in
order
to
make
gain,
dealing
in
such
investments
as
a
business,
and
thereby
seeking
to
make
profits,
which,
as
I
understand
it,
is
the
position
here
claimed
for
the
appellant,
and
in
which
eases
losses
incurred
in
the
same
taxation
period
may
be
set
off
against
gains.
The
line
which
separates
the
two
classes
of
cases
may
be
difficult
to
define,
and
each
case
must
be
considered
according
to
its
facts.
The
question
to
be,
determined
is
whether
the
sum
of
gain
that
has
been
made
is
a
mere
enhancement
of
value
by
realizing
a
security,
or
is
it
a
gain
made
in
an
operation
of
business
in
carrying
out
a
scheme
for
profit-making.
In
considering
such
eases
it
is
not
sufficient
to
consider
merely
what
are
the
powers
and
objects
of
the
company
concerned,
though
that
is
of
importance,
but
rather
what
in
fact
the
company
was
doing
in
the
taxation
period
in
question,
and
that
is
my
apology
for
quoting
at
such
length
from
the
reports
of
the
directors
of
the
appellant
company
to
its
shareholders,
in
order
to
ascertain
what
its
real
position
was.
I
may
quote
from
the
judgment
of
the
Lord
Justice
Clerk
in
the
case
of
the
California
Copper
Syndicate,
supra,
and
this
will
disclose
the
facts
of
that
case
and
what
was
the
opinion
of
the
Court
upon
the
point
there
in
issue.
He
said
(pp.
166-7)
:
"‘This
Syndicate
was
formed
with
a
capital
of
£30,000,
inter
alia,
to
acquire
copper
and
other
mines,
and
certain
mines
named
in
particular,
and
to
prospect
and
explore
for
the
purpose
of
obtaining
information,
and
to
enter
into
treaties,
contracts,
and
engagements
with
respect
to
mines,
mining
rights,
and
a
number
of
other
matters
in
the
United
States
and
elsewhere.
It
was
also
to
carry
on
mercantile,
commercial,
financing
and
trading
businesses,
and
to
work
minerals,
to
establish
and
form
companies
for
such
objects,
to
subscribe
for
purchase
or
otherwise
acquire,
shares
or
stock
of
any
company,
and
accept
payment
in
shares
for
properties
sold
or
business
undertaken
or
services
rendered,
and
to
hold,
sell,
or
dispose
of
the
same,
to
promote
companies
for
the
purpose
of
acquiring
the
undertaking,
property,
and
liabilities
of
the
Company,
or
carrying
on
business
deemed
conducive
of
the
prosperity
of
the
Company.
‘
‘
These
are
shortly
some
of
the
main
purposes
of
the
Company,
and
they
certainly
point
distinctly
to
a
highly
speculative
business,
and
the
mode
of
their
actual
procedure
was
in
the
same
direction.
Of
the
£28,832
realised
by
shares
which
were
subscribed
for,
£24,000
was
invested
in
a
copper-bearing
field
in
the
United
States,
and
the
balance
was
spent
in
development
of
the
field,
and
in
preliminary
and
head
office
expenses.
"‘The
Company
then
were
successful
in
selling
the
property
to
the
Fresno
Company—£300,000
in
fully
paid
up
shares
being
given
by
the
Fresno
Company
for
the
property.
Although
that
was
a
sale,
the
price
to
be
paid
in
shares,
I
feel
compelled
to
hold
that
this
Company
was
in
its
inception
a
Company
endeavouring
to
make
profit
by
a
trade
or
business,
and
that
the
profitable
sale
of
its
property
was
not
truly
a
substitution
of
one
form
of
investment
for
another.
It
is
manifest
that
it
never
did
intend
to
work
this
mineral
field
with
the
capital
at
its
disposal.
Such
a
thing
was
quite
impossible.
Its
purpose
was
to
exploit
the
field,
and
obtain
gain
by
inducing
others
to
take
it
up
on
such
terms
as
would
bring
substantial
gain
to
themselves.
This
was
that
the
turning
of
investment
to
account
was
not
to
be
merely
incidental,
but
was,
as
the
Lord
President
put
it
in
the
case
of
the
Scottish
Investment
Company,
the
essential
feature
of
the
business,
speculation
being
among
the
appointed
means
of
the
Company’s
gains.”
Another
case,
which
is
of
some
assistance
here,
is
that
of
Com’rs
of
Inland
Revenue
v.
Korean
Syndicate
Ltd.,
[1921]
3
K.B.
258.
The
headnote
of
this
case
will
sufficiently
set
out
the
facts;
and
it
reads:
‘‘A
company
was
incorporated
as
a
limited
company
having
for
its
principal
object
the
acquisition
and
working
of
concessions
and
turning
the
same
to
account.
In
1908
the
company
entered.
into
an
agreement
to
lease
a
concession
in
Korea
which
it
had
acquired
in
consideration
of
the
lessees
paying
what
was
therein
described
as
a
royalty,
but
which
was
in
fact
a
percentage
based
on
the
profits
made
by
the
lessees.
The
company
also
received
the
interest
of
a
certain
sum
of
money
on
deposit
at
a
bank.
The
company’s
operations
were
confined
to
the
collection
and
distribution
of
these
two
sources
of
income
and
to
the
payment
of
the
premiums
on
a
sinking
fund
policy.
’
’
It
was
held,
upon
the
construction
of
the.
memorandum
and
the
articles
of
agreement
of
1908
that
the
company
was
carrying
on
the
business
for
which
it
was
incorp-
orated
namely,
the
acquisition
of
concessions
and
the
turning
of
the
same
to
account—and
was
therefore
carrying
on
a
busi-
ness
within
the
meaning
of
s.
39
of
the
Finance
(No.
2)
Act,
1915,
and
was
accordingly
liable
to
be
assessed
to
excess
profits
duty
under
that
Act.
The
point
at
issue
in
this
ease,
and
the
conclusion
reached
by
the
Court
of
Appeal
was
clearly
stated
in
one
paragraph
of
the
judgment
of
Atkin
L.J.,
and
that
is
as
follows
(pp.
275-6)
:
‘‘Now
I
quite
agree
that
it
does
not
necessarily
follow
that
because
a
company
is
incorporated
under
the
Companies
(Consolidation)
Act,
1908,
it
is
carrying
on
a
business.
The
Act
allows
any
number
of
persons,
associated
together
for
any
lawful
purpose,
to
be
registered
in
accordance
with
its
provisions,
and
one
knows
that
a
company
may
be
registered
for
professional
purposes,
or
aS
what
is
called
in
the
Act
an
association
for
purposes
not
for
gain;
but
in
this
case
there
is
a
Syndicate
formed
by
an
association
of
persons
clearly
for
a
profit,
and
the
purpose
for
which
they
are
associated
is
described
by
it
in
its
memorandum
as
that
(inter
alia)
of
acquiring
concessions
and
turning
them
to
account
for
the
purpose
of
making
a
profit,
which
it
may
distribute
amongst
its
shareholders;
and,
having
taken
those
powers,
it
has
in
fact
availed
itself
of
them,
and
that
is
the
course
it
has
adopted.
It
has
acquired
concessions,
and
it
has
turned
them
to
account,
and
the
profits
that
arise
in
this
matter
are
profits
that
arise
from
its
so
turning
them
to
account.
It
seems
to
me
that
it
does
not
at
all
matter
how
it
chooses
to
turn
them
to
account.
In
this
case,
dealing
with
the
question
of
mining
concessions,
it
has
obtained
a
part
share
in
a
very
important
concession
in
Korea
which
gives
it
the
right
to
prospect
over
a
very
large
area,
and
exclusive
rights
of
working
minerals
within
a
particular
district
in
that
area.
That
concession
it
proposed
at
one
time
to
work
itself
and
with
its
own
capital,
and
if
it
had
done
that;
no
question
at
all
would
have
arisen;
but
after
some
two
or
two
and
a
half
years
it
came
to
the
conclusion
that
it
would
not
be
advantageous
to
it
to
do
so,
and
it
therefore
proceeded
to
do
what
many
persons
have
done
as
a
matter
of
business
before—namely,
instead
of
working
its
rights
with
its
own
capital,
it
handed
them
over
to
another
company
to
work,
on
the
terms
that
the
Syndicate
would
receive
an
annual
payment.
I
think
it
matters
very
little
what
that
annual
payment
is
called
or
how
it
is
calculated,
and
in
the
case
of
a
company
of
this
kind
to
my
mind
it
would
make
no
difference
whether
the
payment
was
based
upon
a
calculation
of
the
output
or
was
a
mere
rent;
but
in
fact
in
this
case
the
payment
is
called,
in
the
agreement
of
March
25,
1908,
a
sum
equal
to
8
per
cent.
of
the
net
profit,
and
in
the
other
part
it
is
called
a
share
of
the
profits,
but
whatever
way
it
was,
it
was
the
way
in
which
the
Syndicate
chose
to
make
a
profit.
It
made
it
by
turning
this
concession
to
account
in
this
way,
and
it
has
received
annually,
and
still
receives,
a
regular
sum,
and
that
sum,
together
with
the
other
income
that
is
received
from
a
sum
of
money
that
it
has
made
placed
on
deposit,
it
distributes
as
profits,
and
it
distributes
them
as
a
dividend
amonest
the
shareholders
on
the
terms
of
an
article
(art.
125)
which
provides
that
no
dividend
shall
be
payable
except
out
of
profits
arising
out
of
the
business
of
the
company/’
I
would
also
refer
to
the
case
of
Com’rs
of
Inland
Revenue
v.
Budderpore
Où
Co.
(1921),
12
Tax
Cas.
467,
in
which
the
decision
of
the
Court
of
Appeal
in
the
Korean
Syndicate
case,
supra,
was
followed.
Upon
the
facts
here
I
find
no
difficulty
in
reaching
the
conclusion
that
the
appellant
company
was
in
point
of
fact
carrying
on,
in
the
material
period,
a
trade
or
business
within
the
meaning
of
s.
8
of
the
Income
War
Tax
Act,
and
which
trade
or
business
was
one
within
the
purposes
and
objects
for
which
it
was
incorporated.
Where
a
limited
company
comes
into
existence
for
some
particular
objects
or
purposes,
and
if
in
fact
it
becomes
engaged
in
some
or
all
of
such
objects
or
purposes,
then
that
is
a
matter
to
be
considered
when
you
come
to
decide
whether
doing
that
is
carrying
on
an
ordinary
trading
business
or
not.
The
account
of
the
activities
of
the
appellant
company,
as
found
in
the
annual
reports
of
its
directors
to
the
company’s
shareholders,
would
seem
to
make
it
quite
conclusive,
or
so
it
appears
to
me,
that
the
company
was
carrying
on
a
trade
or
business
for
profit-making.
The
money
invested
by
the
appellant
in
oil
leases
was
not
made
primarily
with
a
view
to
a
resale
of
its
interest
in
the
well
or
wells
to
be
developed,
but
to
something
that
would
produce
a
revenue
to
the
appellant,
and
this
it
did.
And
it
was
that
alone
that
earned
income
for
the
appellant
company.
It
was
only
the
appellant’s
money
that
made
possible
the
successful
development
of
the
Highwood-Sarcee
Well
No.
1,
and
it
purchased
a
65%
interest
in
the
lease
of
this
property
and
its
equipment.
It
might
have
been
of
interest
to
have
had
in
evidence
the
correspondence
exchanged
between
the
appellant
and
the
managers
of
the
stock
exchanges
to
whom
the
former
applied
for
the
listing
of
its
shares
to
see
if
they
were
to
be
listed
as
the
shares
of
a
trading
or
business
organization,
or
that
of
an
investment
company
only.
The
fact
that
the
appellant
associated
itself
with
others
in
leasing
oil
lands,
or
in
developing
or
operating
oil
lands
or
oil
wells,
or
that
it
disposed
of
some
of
its
interests
to
others
under
the
terms
of
an
agreement
whereby,
in
certain
events,
it
was
to
participate
in
any
profits
ultimately
realized,
does
nat
make
it
any
the
less
a
trading
or
business
organization.
It
is
immaterial
whether
the
appellant
hired
prospecting
or
drilling
crews
to
work
on
any
of
the
leases
under
its
control
or
whether
it
hired
others
to
do
this
work.
The
fate
of
the
ventures
in
which
it
placed
its
funds
and
lost
is
of
no
consequence.
The
form
in
which
it
pleases
to
deal
with
any
profit
is
not
of
importance;
that
it
so
deals
with
it,
in
some
form
other
than
in
cash,
would
not
affect
the
claim
of
the
taxing
authorities
for
the
tax
payable
on
such
profit,
if
any.
This
is,
I
think,
a
case
where
the
appellant
was
engaged
in
a
trade
or
business
for
the
purpose
of
profit
making,
and
any
profit
made
is
subject
to
the
tax.
The
losses
made,
and
which
the
appellant
claims
to
set
off
against
profits,
were,
I
think,
clearly
capital
losses,
and
not
expenditures
incurred
for
the
purpose
of
earning
the
income,
within
the
meaning
of
the
Act,
and
are
not
therefore
admissible
as
deductions.
The
appeal
must
therefore
be
dismissed
and
with
costs.
e
Appeal
dismissed
with
costs.
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