HUDSON
J.
(Concurred
in
by
RINFRET,
DAVIS
and
TASCHEREAU.
JJ.)
This
is
an
appeal
from
a
judgment
of
the
late
President
of
the
Exchequer
Court,
which
dismissed
with
costs
an
appeal
by
the
appellant
against
its
assessment
for
income
tax
for
the
taxation
year
1935.
The
appellant
filed
a
return
for
the
period
in
question
showing
a
net
loss,
but
the
Minister
adjusted
the
income
and
declared
that
the
appellant
had
taxable
income
of
$30,254.94
for
the
period
in
question.
This
amount
was
arrived
at
after
making
certain
customary
allowances
and
disallowing
a
sum
of
$74,011.28,
the
amount
of
investments
written
off
by
the
appellant’s
return.
The
decision
of
the
Minister
was
‘‘that
the
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
effect,
capital
in
their
nature,
and
specifically
disallowed
for
income
tax
purposes
under
the
provisions
of
Section
6
of
the
Act.’’
The
appellant
company
was
incorporated
by
letters
patent
and
given
a
wide
range
of
powers,
only
two
of
which
need
be
referred
to.
They
are:
(‘1.
(a)
to
search
for
and
recover
and
win
from
the
earth
petroleum,
natural
gas,
oil,
salt,
metals,
minerals
and
mineral
substances
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,
etc.”
^3.
(1)
to
purchase,
underwrite,
guarantee
the
principal
and
interest
of,
subscribe
for
and
otherwise
acquire
and
hold
and
vote
upon
the
shares,
debentures,
debenture
stock,
etc.
of
any
company,
etc.”
The
appellant,
by
its
income
tax
return,
stated
the
nature
of
its
business
to
be
that
of
"‘oil
operators’’.
The
transactions
giving
rise
to
the
profit
were
as
stated
by
the
learned
President
:—
"‘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,
$60,000.00
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
$60,000.00
out
of
production
and
to
receive
a
65
per
cent.
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
per
cent
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.’’
On
these
facts
the
learned
President
held
that
the
profit
arising
on
this
transaction
was
income.
The
transactions
giving
rise
to
losses
which
the
appellant
claims
the
right
to
set
off
appeared
in
the
balance
sheet
of
the
company
as
of
June
30,
1943,
as
follows:
"‘Investments
and
Advances
written
off
|
Pine
Hill
Petroleums
Limited
|
$56,511.28
|
|
Western
Alberta
Oils
Limited
|
15,000.00
|
|
Sheldon
Burden
of
Canada
Ltd
|
2,500.00
|
|
$74,011.28
|
These
transactions
arose
out
of
the
purchase
of
shares
in
two
other
companies
engaged
in
oil
development
and
in
loans
to
these
companies
or
to
persons
connected
with
their
operations.
They
were
held
by
the
learned
President
to
be
in
the
nature
of
capital
investment
and,
for
that
reason,
the
claim
to
set
off
these
losses
was
disallowed.
It
appears
from
the
evidence
that
the
appellant
did
not
carry
on
the
business
of
buying
and
selling
oil
shares
or
oil
properties.
They
acquired
shares
and
properties
but
there
is
no
record
of
their
having
sold
any.
The
only
reasonable
inference
from
the
method
of
condUcting‘
their
business
was
that
their
purpose
was
to
acquire
these
properties
and
to
hold
them
with
the
hope
that
ultimately
they
might
become
producing
wells,
as
was
done
by
them
in
the
case
of
the
particular
enterprise
which
resulted
in
profits.
The
real
business
of
the
company
is,
I
think,
aptly
described
in
their
return
as
‘‘oil
operators”.
The
argument
pressed
most
strongly
by
Mr.
Patterson
is
that
the
transactions
in
the
ease
of
the
losses
were
essentially
of
the
same
character
as
those
in
the
profitable
transactions
and
that
if
the
profits
were
taxable
in
the
one,
losses
in
the
others
might
properly
be
set
off.
He
contended
that
the
activities
of
the
company
were
analogous
to
those
of
an
insurance
company
which
did
marine,
fire
and
life
insurance
and
lost
in
one
branch
and
made
profits
in
the
other,
and
it
was
held
that
the
business
of
all
should
be
read
as
one
for
the
purpose
of
ascertaining
taxable
income.
It
could
not,
I
think,
on
the
facts
be
successfully
contended
that
the
moneys
invested
in
these
shares
and
the
loans
made
were
not
in
their
nature
capital
investments,
and
the
only
point
that
has
caused
me
some
difficulty
is
whether
or
not
this
capital
investment
could
be
considered
as
in
the
nature
of
circulating
capital
and
not
fixed.
The
illustrations
are
those
of
manufacturers
having
purchased
raw
material
and
of
merchants
trading
in
goods
which
they
got
for
resale,
or
loans
made
by
a
brewery
company
to
its
customers.
In
each
of
these
cases
capital
moneys
are
used
and
yet
losses
were
allowed.
In
the
present
case
the
shares
were
not
acquired
to
be
turned
over
like
a
merchant’s
stock
of
goods,
but
to
be
held
with
a
view
of
future
profit
from
development.
The
loans
were
not
made
for
the
purpose
of
furthering
the
day
to
day
business
of
the
company.
For
these
reasons,
I
think
the
investments
were
in
their
nature
of
fixed
and
not
of
circulating
capital.
The
appeal
should
be
dismissed
with
costs.
Email this Content