Bow River Pipe Lines Ltd. v. R., [1997] 1 CTC 2306

Christie A.C.J.T.C.: — The years under review are 1987 to 1991 inclusive. It is the position of the appellant that consequent upon the dissolution of a limited partnership named LRR Partnership Limited (“the partnership”) established under the Partnership Act of Alberta, particulars of which will follow, the appellant, who allegedly was at one time the sole limited partner, was entitled to rely on paragraph 98(5)(d) of the Income Tax Act (“the Act”) after its conditional repeal in 1986. Counsel agree that the purport of subsection 98(5) is correctly set out in volume 3 of the Canadian Tax Reporter at 13,227-8 as follows:

Subsection 98(5) permits a tax-free rollover where, within three months of the termination of a Canadian partnership defined in section 102 [1] , one but not more than one of the partners commences to carry on the business of the previous partnership as a sole proprietor, using the partnership property received by him as proceeds of disposition of his partnership interest. As a matter of law, a partnership ceases to exist when one partner acquires the partnership interests of all other partners.

Until the enactment of section 26 of the Statutes of Canada 1986, c. 55 included in the rules for determining the proprietor’s cost and proceeds of disposition of partnership property was paragraph 98(5)(d). [2]

Section 26 made the application of that paragraph subject to transitional rules. The issue is whether having regard to those transitional rules paragraph 98(5)(d) can be relied on by the appellant in the circumstances hereinafter described. The relevant provisions of section 26 are subsections (4) and (5). They provide:

(4) Paragraph 98(5)(d) of the said Act is repealed.

(5) Subsections (1) to (4) are applicable with respect to property received by a member of a partnership where

(a) the property was acquired by the partnership after December 4, 1985, otherwise than pursuant to an agreement in writing entered into before that date,

(b) the property is received in satisfaction of an interest in the partnership

acquired by the member after December 4, 1985, otherwise than

(i) pursuant to an agreement in writing entered into on or before that date, or

(ii) from a person with whom the member was not dealing at arm’s length, where the interest in the partnership has not been acquired in an arm’s length transaction after December 4, 1985, otherwise than pursuant to an agreement in writing entered into on or before that date, or

(c) the property is received in satisfaction of an interest in the partnership that was owned by a corporation at a time when control thereof was acquired (otherwise than by virtue of an acquisition described in paragraph 256(7)(a) of the said Act) after December 4, 1985, otherwise than pursuant to an agreement in writing entered into on or before that date,

and, for the purposes of subparagraph (b)(ii), the references to “arm’s length” shall be interpreted as though the said Act were read without reference to paragraph 251 (5)(b) thereof.

The date December 4, 1985 is of paramount importance in this litigation.

There is agreement between the parties about the facts that follow. The appellant, Lone Rock Resources Ltd. (“Lone Rock”) and 335827 Alberta Ltd. (“the Numbered Company”) were each incorporated under the laws of Alberta and are governed by the Business Corporations Act of that province (“the Corporations Act’). At the times germane to this appeal each was a private corporation and a taxable Canadian corporation as defined under subsection 89(1) of the Act. Paragraphs 89( 1 )(f), 89( 1 )(i) and subparagraph 89( 1 )(a)(i) of the Act provide:

89( 1 ) In this subdivision,

(f) “private corporation” at any particular time means a corporation that, at the particular time, was resident in Canada, was not a public corporation, and was not controlled, directly or indirectly in any manner whatever, by one or more public corporations; and for greater certainty for the purposes of determining, at any particular time, when a corporation last became a private corporation,

(i) “taxable Canadian corporation” means a corporation that, at the time the expression is relevant,

(i) was a Canadian corporation.

(a) “Canadian corporation” at any time means a corporation that was resident in Canada at that time and was

(i) incorporated in Canada.

Further, at all times relevant to this appeal: (i) the appellant operated a crude oil pipe line gathering and transmission system in Alberta and Saskatchewan and (ii) the appellant and Lone Rock were each engaged in the business of exploring for, developing and producing crude oil, natural gas and related hydrocarbons in Western Canada. Koch Exploration Canada Ltd. (“Koch”) is a U.S. resident corporation engaged in the business of exploring for, developing and producing crude oil, natural gas and related hydrocarbons in Western Canada as well as the provision of exploration and production services to affiliated corporations. It was the parent of the appellant.

These events occurred in the chronological order indicated.

A. 9 September 1985:

The Numbered Company was incorporated under the Corporations Act.

B. 10 October 1985:

Mr. C. Michael Ryer, counsel for Koch, wrote to Mr. John Miller, President of Koch, offering initial advice regarding the proposed acquisition of Lone Rock by the appellant. The letter reads:

Re: Proposed Acquisition of Lone Rock Resources Limited (“Lone Rock’’) by Bow River Pipelines Ltd. (“Bow River”)

Further to our meeting of Wednesday, October 9, 1985 the following summary of our initial advice is offered for your consideration. All references herein to sections, subsections, paragraphs and subparagraphs are to the Income Tax Act (Canada) (the “Act”) unless otherwise expressly stated.

FACTS TS

In general terms, we understand the pertinent facts to be as follows:

1. Lone Rock and Bow River are taxable Canadian corporations as defined in paragraph 89(1 )(i). The taxation year of Bow River ends on December 31 and the taxation year of Lone Rock ends on September 30.

2. As of September 30, 1984 Lone Rock had “tax pools” as follows:

Non-Capital Losses

year ended September 30, 1981	$ 1,192,564
year ended September 30, 1981
ended September 30, 1982	589,192
year ended September 30,1982
Undepreciated Capital cost (UGC)	$1,062,941
Undepreciated Capital cost ('UCC)
Cumulative Canadian oil and gas
property expense ('CCOGPE‘)	$2,658,811
property expense (CCOGPE*)
Cumulative Canadian Development Expense CCDE	$ 32,641
Cumulative Canadian Development Expense ( CCDE )
Earned Depletion Base	$ 136,162
Earned Depletion Base
Attributable Canadian Royalty Income Balance	$3,097,605
Attributable Canadian Royalty Income Balance

3. Lone Rock owes approximately $7,000,000 to the Bank of Montreal.

4. Bow River is negotiating with the shareholders of Lone Rock with a view to acquiring 100 per cent of the issued and outstanding shares of Lone Rock for a purchase price of approximately $5,000,000.

PROPOSED TRANSACTIONS

The following transactions were discussed at our recent meeting:

1. Lone Rock would incorporate a wholly-owned subsidiary (“Newco”).

2. Lone Rock and Newco would form a limited partnership (the “Partnership”) pursuant to the Partnership Act (Alberta).

3. Lone Rock would contribute a 90 per cent undivided interest in its oil and gas assets to the Partnership in exchange for a 99.99 per cent interest in the Partnership. Newco would have a .1 per cent interest in the Partnership. The remaining 10 per cent of the oil and gas assets (the “Retained Assets”) would be left in Lone Rock to ensure that the resource pools of Lone Rock were not “streamed” through the application of the successor rules at a time when Lone Rock did not own any Canadian resource property. The Partnership and Lone Rock would execute and file elections pursuant to subsection 97(2) in prescribed form and manner in order to ensure that the transfer occurred on a “roll-over” basis. The selection of the elected amounts is discussed hereinafter.

4. Bow River would acquire the shares of Lone Rock for, say, $5,000,000. Thereafter, Bow River would subscribe for $7,000,000 worth of treasury shares of Lone Rock. The subscription proceeds would be used by Lone Rock to retire its bank debt.

5. If necessary in order to utilize the non-capital losses of Lone Rock, Bow River would transfer one or more producing properties to Lone Rock on a “roll-over” basis in exchange for shares of Lone Rock. Elections pursuant to subsection 85(1) would be executed and filed in prescribed form and manner with respect to such transfer.

6. At such time as the non-capital losses of Lone Rock have been used up, Lone Rock would be wound-up into Bow River on a “roll-over” basis pursuant to subsection 88(1). The result of such a winding-up would be that all of Lone Rock’s assets, which would consist of the 99.9 per cent interest in the Partnership, the Retained Assets and any properties acquired from Bow River would be distributed to Bow River.

7. After the winding-up of Lone Rock, Newco would be wound-up with the result that its partnership interest would be distributed to Bow River. As a result, the Partnership would then cease to exist and all of the assets of the Partnership would be distributed to Bow River.

INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS

The implementation of the proposed transactions should have the following income tax consequences:

1. The transfer of the Canadian oil and gas assets from Lone Rock to the Partnership can be accomplished on a tax deferred or “roll-over” basis pursuant to subsection 97(2) provided that the appropriate elections are duly made and filed. The elected amount for the tangible depreciable property will presumably be the UCC of such property. There is considerable latitude in the selection of the elected amount for the Canadian resource property. If a nominal elected amount is chosen, the resource tax pools will remain with Lone Rock. After the change in control of Lone Rock such pools will, pursuant to the successor rules, be “streamed” to production from properties in which Lone Rock had an interest immediately prior to the change of control and the proceeds from any disposition of such properties. Provided that the Retained Assets include undivided interests in all of Lone Rock’s properties the application of the successor rules should not present a problem. If an elected amount equal to the CCOGPE of Lone Rock was selected and if the acquisition of control of Lone Rock occurred during the first fiscal period of the Partnership it would appear that the successor rules would be avoided because, at the time of the change in control, Lone Rock would not have any CCOGPE. Rather, Lone Rock would be entitled to an allocation of Canadian oil and gas property expenses (“COGPE”), in an amount equal to 99.9 per cent of the elected amount, from the Partnership at the end of the fiscal period of the Partnership.

2. The aggregate adjusted cost base of all of the Lone Rock shares owned by Bow River would be approximately $12,000,000.

3. The winding-up of Lone Rock and the consequential distribution of its assets to Bow River will occur on a “roll-over” basis pursuant to subsection 88(1). Pursuant to paragraph 88(1 )(d), and provided Lone Rock’s interest in the Partnership is capital property, Bow River will be able to “bump” the cost for tax purposes of the Partnership interest acquired on the winding-up to an amount equal to the adjusted cost base of the Lone Rock shares less certain deductions including the amount of cash or other property acquired on the winding-up and dividends previously received from Lone Rock. The details of these deductions will have to be given further consideration.

4. The dissolution of the Partnership, which will occur as a consequence of the winding-up of Newco, will occur on a “roll-over” basis pursuant to subsection 98(5). In accordance with paragraph 98(5)(b), the assets of the Partnership will be deemed to have been acquired by Bow River at a cost equal to their cost amount, for the purposes of the Act, to the Partnership plus an additional designated amount (the “Designated Amount”) determined in accordance with paragraph 98(5)(d). In general terms, the Designated Amount will be the amount by which the adjusted cost base to Bow River of its interest in the Partnership exceeds the aggregate cost amount to the Partnership of the assets which will be distributed to Bow River on the dissolution of the Partnership. In the case of Canadian resource property, as defined in the Act, and depreciable capital property, as defined in the Act, the amount which may be designated is limited to one-half of the Designated Amount. In addition, the amount which can be designated in respect of each former partnership property is limited to that amount which would result in the cost amount of the particular property being increased to the fair market value of such property. It is generally considered that the cost amount of Canadian resource property which is distributed on the dissolution of a partnership is nil.

CONCLUSION

In our view the foregoing indicates that the COGPE “bump” would be computed from a starting point of a $12 million adjusted cost base of the Lone Rock shares. It is apparent that the co-operation of Lone Rock will be required in terms of the organization of the Partnership and the contribution of assets thereto. It is likely that some compensation will have to be given to the shareholders of Lone Rock in order to ensure their cooperation. Apart from that additional cost and the extra cost in terms of additional accounting and legal input, we believe that their (sic) is little downside to Bow River in terms of attempting to obtain the COGPE “bump”. We do not see any income tax disadvantage to Bow River as a result of an attempt to obtain the COGPE “bump”. However, it is also clear that the availability of the COGPE “bump” is by no means certain, although it is at least probable.

As you will appreciate this letter is fairly general and a considerable number of details will require attention if you wish to implement the transactions described herein. We have provided a copy of this letter to Mr. R.W. Bowhay for his comments, and would suggest that Mr. Bowhay be consulted before a decision is made to pursue the COGPE “bump”.

C. 16 October 1985:

By letter of that date (“the First Letter”) Koch, as agent for the appellant, proposed to purchase from the shareholders of Lone Rock all of the issued and outstanding shares of Lone Rock. The letter is addressed to the shareholders of Lone Rock. It reads:

This letter is forwarded to you by Koch Exploration Canada, Ltd. (“Koch”) in pursuance of the discussions we have had relative to the purchase by Koch of all of the shares of Lone Rock Resources (“Lone Rock”). In the course of such discussions, Lone Rock has provided to Koch copies of land

schedules entitled respectively: Alberta Acreage; Saskatchewan Acreage, and British Columbia Acreage (the “Land Schedules”); copies of the Financial Statements for Lone Rock up to July 31, 1985 (the “Financial Statements”); and copies of the Federal and Provincial Corporation Income Tax Returns for Lone Rock up to the taxation year ended September 30, 1984 (the “Tax Returns”).

We understand that the authorized capital of Lone Rock is an unlimited number of Class “A” no par value voting shares of which 6,126,709 are issued and held as follows:

Shareholders	Wham
Lone Rock Energy Limited	3,669,543
Danford E.E. Bodrug	2
Bodrug & Son Acceptance Ltd.	424,220
99109 Canada Ltd.	1,192,360
Robert Edgar McLennan	22,955
Estate of Evan W.G. Bodrug	$17,629
	817.629
Total Issue	6,126,709
	6,126,709

We further understand that:

i) the working interests in oil and gas properties to which Lone Rock is presently entitled and the encumbrances thereon are as has been represented to us;

ii) Lone Rock has conducted its business in the ordinary course during Lone Rock’s current fiscal period and will continue to do so up to closing; and

iii) all debt of Lone Rock, except its “net bank position” as hereinafter defined, will have been paid, forgiven or otherwise discharged prior to or concurrent with the sale of the Lone Rock shares to Koch.

We have, otherwise, relied upon the information contained in the Land Schedules, the Financial Statements and the Tax Returns and the within proposal is based and conditioned upon such reliance and the understanding aforesaid.

It is proposed that Koch purchase from you all of the issued and outstanding shares of Lone Rock for a net purchase price calculated as follows:

Gross amount: Cdn $12,340,000

Less: Lone Rock’s “net bank position” as of the closing date, calculated in the same manner as in the table entitled “Month-End Position” attached to the financial statements prepared as of July 31, 1985, at which date the net bank position equalled $7,084,000

Net Purchase Price: Cdn$

It is understood that the purchase by Koch may be done on behalf of any Koch subsidiary or affiliated company. The effective date for the purchase will be October 1, 1985. A closing date of December 17, 1985 is proposed.

If this proposal is acceptable to you, Koch will prepare for your consideration a formal sale agreement and related documentation. Prior to closing Koch would not expect you to offer any of the Lone Rock shares for sale to any other entity and your acceptance of this proposal is your confirmation of this. Completion of the sale of the Lone Rock shares to Koch will be subject to the tender of all the issued and outstanding shares, mutually satisfactory documentation, regulatory approvals (including Investment Canada approval), approval of directors, opinions of counsel and completion of other related matters in a manner satisfactory to each of yourself and Koch. [Emphasis added.]

This proposal has been prepared in multiple original counterparts. If it is acceptable to you, it would be appreciated if you would sign each of the enclosed multiple originals in the space provided therefor below and return all, saving one for your records, so signed to the undersigned at the letterhead address before 4:30 p.m. on October 25, 1985.

D. 25 October 1985:

The following appears on the First Letter after the signature of A.J. Miller, President of Lone Rock: “THE UNDERSIGNED HEREBY ACCEPT THE FOREGOING PROPOSAL THIS 25 DAY OF OCTOBER, 1985.” This is followed by signatures on behalf of Lone Rock and the shareholders thereof, namely, Bodrug & Son Acceptance Ltd., 99109 Canada Ltd. and the individuals Danford E.E. Bodrug and Robert Edgar McLennan, plus the administrator of the Estate of Evan W.G. Bodrug.

E. 28 October 1985:

By letter of that date (“the Second Letter”) also addressed to the shareholders of Lone Rock, Koch proposed to increase the net purchase price by $450,000.00. This letter reads:

We refer to our October 16, 1985 correspondence (the “Original Proposal”) pertaining to the acquisition by Koch Exploration Canada, Ltd. (“Koch”) of all of the shares of Lone Rock (the “Shares”). We hereby propose to increase the net purchase price as indicated in the Original Proposal by $450,000, subject to the conditions set out in our Original Proposal and subject to the following conditions, namely:

1. At the time of the closing of purchase of the Shares, the assets of Lone Rock will include a significant interest in a partnership (the “Partnership”) which is the owner of substantially all of the working interests in the oil and gas properties of Lone Rock which are referred to in the Original Proposal.

2. Prior to the closing of the purchase of the Shares, Koch shall have received a favourable income tax ruling (the “Ruling”) from Revenue Canada confirming that as a consequence of the liquidation of Lone Rock into Koch and thereafter the liquidation of the Partnership into Koch, Koch shall be entitled to “step-up” the cost, for income tax purposes, of working interests in the former assets of the Partnership to an amount not less than $4,500,000.

If the Ruling is not obtained by December 11, 1985, then, unless otherwise agreed, closing of the purchase of the Shares shall occur on December 17, 1985 at and for a price equal to the net purchase price plus $15,000. If the Ruling is obtained after December 11, 1985, then Koch shall pay the sum of $450,000 as additional consideration for the Shares, such payment to be made within 14 days from the date of receipt of the Ruling.

The effective date of the transaction must follow the establishment of the Partnership and we therefore propose an effective date of November 15, 1985, but we anticipate that the original closing date of December 17, 1985 could be maintained.

Koch acknowledges that all costs associated with the application for the Ruling will be for its account.

This proposal has been prepared in multiple original counterparts. If it is acceptable to you, it would be appreciated if you would sign each of the enclosed multiple originals in the space provided therefore below and return all except one of such originals, duly executed, to the undersigned at the letterhead address on or before 4:30 p.m. on October 31, 1985.

F. 29 October 1985:

Again on the Second Letter the signature of A.J. Miller, President of Koch, is followed with this: “THE UNDERSIGNED HEREBY ACCEPT THE FOREGOING PROPOSAL THIS 29 DAY OF OCTOBER, 1985.” The same corporations that and individuals who signified their acceptance of the First Letter did so with respect to the Second Letter.

G. 8 November 1985:

Lone Rock became the sole shareholder of the Numbered Company.

The foregoing is all of the evidence pertinent to what occurred prior to December 4, 1985.

H. 16 December 1985:

By letter of this date to the shareholders of Lone Rock (“the Third Letter”) Koch wrote to Lone Rock suggesting a change in the closing date. The letter reads:

With respect to the acquisition of Lone Rock Resources Ltd. by Bow River Pipe Lines Ltd., it is now apparent that the proposed closing date of December 17, 1985 cannot be met. Also, we are advised that the transaction cannot be closed until we have in hand the approval of Investment Canada. The Application for Review was submitted December 5, 1985, but, as you know, there is a possibility of an extended delay before approval is granted.

We would therefore suggest that the closing date now be established as the

later of:

a) January 8, 1986; or

b) the first Tuesday in the week following the week in which the approval in writing of Investment Canada is received;

provided that if such approval is not received by March 4, 1985, either party may, at its option, terminate the proposed acquisition.

If you are in accord with the foregoing, would you kindly sign and return the attached copy of this letter.

I. 17 December 1985:

This appears on the face of the Third Letter: “THE ABOVE SIGNED HEREBY ACCEPT THE FOREGOING PROPOSAL THIS 17 DAY OF DECEMBER, 1985”. This acceptance is by the same corporations that and individuals who accepted the proposals in the First and Second Letter.

J. 27 December 1985:

The Honourable Sinclair Stevens, Minister responsible for Investment Canada, wrote the appellant, granting approval under the Investment Canada Act.

K. 14 January 1986:

This Resolution was passed by the Directors of the Numbered Company:

RESOLUTION OF THE DIRECTORS OF 335827 ALBERTA LTD., APPROVED, ADOPTED AND CONSENTED TO IN WRITING WITHOUT THE HOLDING OF A MEETING AS EVIDENCED BY THE SIGNATURES OF ALL OF THE DIRECTORS PURSUANT TO THE BY-LAWS OF THE CORPORATION

WHEREAS it is desirable and in the best interests of the Corporation to create a partnership with Lone Rock Resources Ltd. which will acquire all or substantially all of the oil and gas properties of Lone Rock Resources Ltd.;

AND WHEREAS it is desirable and in the best interests of the Corporation to enter into a Limited Partnership Agreement with Lone Rock Resources Ltd., an Alberta company, pursuant to the terms and conditions contained in the form of proposed Limited Partnership Agreement annexed hereto as Schedule “A”;

NOW THEREFORE BE IT RESOLVED THAT:

1. The Corporation do enter into a Limited Partnership Agreement with Lone Rock Resources Ltd. pursuant to the terms and conditions of the proposed Limited Partnership Agreement annexed to this Resolution as Schedule “A” (herein “Limited Partnership Agreement”).

2. The President of the Corporation be and the same is hereby authorized and directed to:

(a) negotiate, consent to or acquiesce in any amendments, revisions, dele tions or additions to the said Limited Partnership Agreement which he in his sole discretion deems in the best interests of the Corporation or are necessary in order to conclude the said transaction and further to execute same on behalf of and in the name of the Corporation;

(b) negotiate, enter into, approve and adopt on behalf of the Corporation any and all agreements, documents and undertakings ancillary or necessary for the establishment of the said Limited Partnership and execute same on behalf of and in the name of the Corporation;

(c) take any and all actions, steps or proceedings on behalf of the Corporation which he in his sole discretion deems advisable and in the best interests of the Corporation and are necessary to establish the Limited Partnership.

DATED, the 14th day of January, 1986.

On the same date the Numbered Company and Lone Rock entered into a limited partnership agreement. The general partner was the Numbered Company and Lone Rock was the sole limited partner. On the same date this Certificate was executed by the Numbered Company and Lone Rock:

CERTIFICATE OF LIMITED PARTNERSHIP

PURSUANT TO SECTION 51 OF THE PARTNERSHIP ACT, REVISED STATUTES OF ALBERTA, 1980, CHAPTER P-2 AND AMENDMENTS THERETO

1. The firm name under which the Limited Partnership is to be conducted is “LRR LIMITED PARTNERSHIP”.

2. The character of the business of the Limited Partnership is to carry on the exploration for and development and production of oil, gas and related hydrocarbons in Canada, as well as any other business which the General Partner considers appropriate.

3. The name and place of residence of each Partner, both General and Limited, are as follows:

General Partner:

335827 Alberta Ltd. 100, 610 - 8th Avenue S.W. Calgary, Alberta T2P 1G5

Limited Partner:

Lone Rock Resources Ltd. 1000, 610 - 8th Avenue S.W. Calgary, Alberta T2P 1G5

4. The Limited Partnership commenced as of January 14, 1986. The Limited Partnership shall terminate on December 31, 2050 unless sooner dissolved earlier or terminated pursuant to Article XIII of the Partnership Agreement.

5. The Limited Partner shall contribute, in assets, various petroleum and natural gas rights, tangibles and miscellaneous interests in accordance with the provisions of a proposed Roll-Over Agreement between the Limited Partner and the Partnership which contributed assets shall have a fair value of approximately $12,500,000.00.

The General Partner shall contribute, in cash, the sum of $1,200.00.

6. The Limited Partner is not required to make any other or additional contributions.

7. Pursuant to Article VIII of the Partnership Agreement, the General Partner shall, from time to time and not less than semi-annually, determine the amount by which the liquid assets of the Partnership exceed the amount which, in the opinion of the General Partner, is required for the business, liabilities and operations of the Partnership and to reimburse the General Partner for any amounts owing to it and shall then convert such excess to cash and distribute such amounts to the Partners in proportion to their respective interests in the Partnership.

8. The Limited Partner, by reason of its contribution, is entitled to receive 99.99 per cent of all profits of the Partnership and the General Partner, by virtue of its contribution, is entitled to receive 0.01 per cent of the profits of the Partnership.

9. A Limited Partner has the right to transfer his Units but in doing so must comply with the provisions of Article XII of the Partnership Agreement.

10. No time has been agreed upon within which the contribution of the Limited Partner is to be returned.

11. No right has been given to the Limited Partner to substitute an assignee as contributor in his place.

12. No right has been given to admit additional Limited Partners.

13. No Limited Partner has a right of priority over other Limited Partners to a return of contributions or to compensation by way of income or any other priority.

14. The General Partner is a corporation and may be removed as the General Partner at any time by an Extra-Ordinary Resolution passed by the Limited Partner which resolution shall appoint a new General Partner to the Partnership as a replacement for the General Partner being removed.

15. Except upon the dissolution of the Partnership, no Limited Partner has the right to demand or receive property other than cash, in return for his contribution.

16. The Limited Partnership Agreement attached as Exhibit “A” hereto is, by this present reference, incorporated herein, to have the same effect as if each and every term thereof were set forth in this present Certificate.

IN WITNESS WHEREOF 335827 Alberta Ltd., as General Partner, and Lone Rock Resources Ltd., as Limited Partner, have executed this Certificate as of the 14th day of January, 1986.

Further on this date the partnership entered into a “rollover agreement” with Lone Rock whereby Lone Rock transferred all of its Canadian resources property and depreciable property to the partnership in return for a 99.99 per cent interest in that partnership. The agreement recites that its “effective date is 12:01 a.m. on the 15th day of January 1986”.

L. 15 January 1986:

On this date the appellant, Lone Rock and all of the shareholders of Lone Rock executed a “Share Purchase Agreement”. This document begins with the statement, “THIS AGREEMENT made as of the 29th day of October 1985” and deals with the acquisition of the shares of Lone Rock. The shareholders of Lone Rock sold all of their shares to the appellant.

M. 16 January 1986:

Mr. Ryer wrote to the Corporate Rulings Directorate of Revenue Canada at Ottawa requesting an advance income tax ruling in relation to certain of the income tax consequences arising from the acquisition of Lone Rock by the appellant.

N. 28 January 1986:

On this date the directors of Lone Rock adopted this resolution:

The undersigned, being all of the directors of Lone Rock Resources, Ltd. (“Corporation”), an Alberta corporation, subject to the Companies Act of the Province of Alberta, do hereby consent in writing to the adoption of, and do hereby adopt, the following resolution:

RESOLVED:

1. That the subscription tendered by Bow River Pipe Lines Ltd. of Calgary, Alberta, for 7,822,053 Class “A” shares of the Corporation for a total price of $7,053,840.82 be, and hereby is, approved and accepted; and

2. That the Corporation issue Share Certificate No. 20 in the name of Bow River Pipe Lines Ltd. for 7,822,053 Class “A” shares of the Corporation, such shares being issued as fully paid and non-assessable; and

3. That Bow River Pipe Lines Ltd. be, and hereby is, instructed to remit the subscription price of $7,053,840.82 to the Bank of Montreal in settlement of loan advances made to the Corporation by the said Bank of Montreal.

Effective: January 28, 1986.

O. 13 June 1986:

On this date Revenue Canada replied to Mr. Ryer’s letter of January 16, 1986 as follows:

This is further to our recent telephone conversation (Senecal/Ryer) during which we discussed the reasons why this Department will not be providing “grandfathering” rulings or opinions with respect to the proposed amendments tabled in the House of Commons by the Minister of Finance on June 11, 1986 governing the step-up in the tax value of distributed partnership property on partnership dissolutions.

We are therefore closing our file with respect to your request. Your $250.00 deposit will be refunded to you under separate cover.

P. 29 September 1986:

These three events took place:

(i) Lone Rock as the “Transferor” and the appellant as “Transferee” entered into a “Distribution Agreement” that reads:

WHEREAS the Transferor is a taxable Canadian corporation, within the meaning of paragraph 89(1 )(i) of the Income Tax Act (Canada) (the “Act”); and

WHEREAS all of the issued shares of the Transferor are owned by the Transferee which is also a taxable Canadian corporation, within the meaning of paragraph 89(1 )(i) of the Act; and

WHEREAS the Transferee, as the sole shareholder of the Transferor has, by resolution passed on September 29, 1986, resolved to cause the dissolution of the Transferor pursuant to and in accordance with the provisions of section 203 of the Business Corporations Act (Alberta); and

WHEREAS the directors of each of the Transferor and the Transferee have, by separate resolution, passed on September 29, 1986, resolved that all of the property and assets of the Transferor should be distributed and that all of its liabilities should be discharged on the terms and conditions hereinafter contained; and

WHEREAS the Transferee has by resolution of its directors agreed to assume and discharge all of the liabilities of the Transferor on the terms and conditions hereinafter contained;

NOW THEREFORE in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by each of the parties hereto, such parties agree as follows:

1. Distribution of Assets

The Transferor hereby assigns, transfers and conveys to and sets over unto the Transferee all of the right, title and interest of the Transferor in and to all its property, assets and business.

2. Assumption and Discharge of Liabilities

The Transferee hereby assumes and undertakes to pay and discharge all of the liabilities of the Transferor and agrees that, as between the parties hereto, such liabilities shall thereby be deemed to be discharged.

(ii) the Registrar of Corporations issued a Certificate of Dissolution of Lone Rock pursuant to the Corporations Act. [3]

(iii) the Numbered Company as General Partner and Bow River as Limited Partner and “as successor to Lone Rock Resources Ltd.” executed this document:

NOTICE TO AMEND CERTIFICATE

We, the undersigned, hereby give notice that the Certificate of Limited Partnership of LRR Limited Partnership dated January 14, 1986 and registered at Central Registry of the Province of Alberta as L.P. 2925 on January 14, 1986 (the “Certificate”) is hereby amended as follows:

I. Paragraph 3 to the Certificate is deleted and the following is substituted therefor:

3. The name and place of residence of each Partner, both General and Limited, are as follows:

General Partner:/Limited Partner:

335827 Alberta Ltd.: Bow River Pipe Lines Ltd.

400 Bow Valley Sq. I: 400 Bow Valley Sq. I

202 - 6th Avenue S.W.: 202 - 6th Avenue S.W.

Calgary, Alberta: Calgary, Alberta

SAVE AS AFORESAID, the Certificate is hereby ratified and confirmed.

Q. 30 September 1986:

These four events occurred:

(i) the Numbered Company as the “Transferor” and the appellant as the “Transferee” entered into a “Distribution Agreement” that reads:

WHEREAS the Transferor is a taxable Canadian corporation, within the meaning of paragraph 89(1 )(i) of the Income Tax Act (Canada) (the “Act”); and

WHEREAS all of the issued shares of the Transferor are owned by the Transferee which is also a taxable Canadian corporation, within the meaning of paragraph 89(1 )(i) of the Act; and

WHEREAS the Transferee, as the sole shareholder of the Transferor has, by resolution passed on September 30, 1986, resolved to cause the dissolution of the Transferor pursuant to and in accordance with the provisions of section 203 of the Business Corporations Act (Alberta); and

WHEREAS the directors of each of the Transferor and the Transferee have, by separate resolution, passed on September 30, 1986, resolved that all of the property and assets of the Transferor should be distributed and that all of its liabilities should be discharged on the terms and conditions hereinafter contained; and

WHEREAS the Transferee has by resolution of its directors agreed to assume and discharge all of the liabilities of the Transferor on the terms and conditions hereinafter contained;

NOW THEREFORE in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by each of the parties hereto, such parties agree as follows:

1. Distribution of Assets

The Transferor hereby assigns, transfers and conveys to and sets over unto the Transferee all of the right, title and interest of the Transferor in and to all its property, assets and business.

2. Assumption and Discharge of Liabilities

The Transferee hereby assumes and undertakes to pay and discharge all of the liabilities of the Transferor and agrees that, as between the parties hereto, such liabilities shall thereby be deemed to be discharged.

(ii) the partnership and the appellant entered into a Distribution Agreement that reads:

WHEREAS effective September 29, 1986, Lone Rock Resources Ltd., the former sole limited partner of the Partnership, was wound-up into its parent, Bow River, which now is the sole limited partner; and

WHEREAS Bow River, as the sole shareholder of 335827 Alberta Ltd. (“335827”), the general partner, has, by resolution passed on September 30, 1986, resolved to cause the dissolution of 335827 pursuant to and in accordance with the provisions of section 203 of the Business Corporations Act (Alberta);

and

WHEREAS the winding-up of the General Partner will, by operation of law, result in the dissolution of the Partnership; and

WHEREAS the Partnership has, by resolution passed on September 30, 1986, resolved that all of the property and assets of the Partnership should be distributed and that all of its liabilities should be discharged on the terms and conditions hereinafter contained; and

WHEREAS Bow River has, by resolution of its directors, agreed to assume and discharge all of the liabilities of the Partnership on the terms and conditions hereinafter contained;

NOW THEREFORE in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by each of the parties hereto, such parties agree as follows:

1. Distribution of Assets

The Partnership hereby assigns, transfers and conveys to and sets over unto Bow River all of the right, title and interest of the Partnership in and to all its property, assets and business.

2. Assumption and Discharge of Liabilities

Bow River hereby assumes and undertakes to pay and discharge all of the liabilities of the Partnership and agrees that, as between the parties hereto, such liabilities shall thereby be deemed to be discharged.

(iii) the Registrar of Companies issued a Certificate of Dissolution of the Numbered Company pursuant to the Corporations Act.

(iv) this document was executed by the Numbered Company and the appellant:

IN THE MATTER OF LRR LIMITED PARTNERSHIP

AND IN THE MATTER OF SECTION 68 OF THE PARTNERSHIP ACT, BEING CHAPTER P-2 OF THE REVISED STATUTES OF ALBERTA, 1980, AS AMENDED.

NOTICE TO CANCEL CERTIFICATE

THE UNDERSIGNED hereby give notice that the Certificate of Limited Partnership of LLR Limited Partnership (the “Partnership”) registered in the Central Registry for the Province of Alberta as L.P. 2925 on the 14th day of January, 1986 is cancelled due to the dissolution of the Partnership, effective September 30, 1986.

Relying on paragraph 98(5)(d) of the Act, the appellant increased the cost of the Canadian resource property received on the termination of the limited partnership and added the increase (“the COGPE addition”) to its cumulative Canadian oil and gas property expense (“CCOGPE”) account in respect of Canadian resource property it received on the termination of the partnership.

As indicated in the following Notices of Reassessment issued in respect of the appellant’s 1987, 1988, 1989, 1990 and 1991 taxation years, the Minister reassessed the appellant by disallowing deductions claimed by the appellant in respect of the COGPE addition:

Taxation Year Date of Reassessment Reassessment Number

1987	December 6, 1993	382 7633
1988	December 6, 1993	382 7693
1989	December 6,1993	382 2735
1990	February 16, 1994	382 9066
1991	February 16, 1994	382 9079

The appellant objected to the reassessments which were subsequently confirmed by the Minister of National Revenue. This appeal followed.

Turning now to some authorities and my analysis of subsections 26(4) and (5) of the 1986 legislation, in Stubart Investments Ltd. v. R. (sub nom. Stubart Investments Ltd. v. The Queen), [1984] S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, Mr. Justice Estey, speaking on behalf of a majority of the Court, said at page C.T.C. 316 (D.T.C. 6323) with reference to the construction of taxing statutes:

While not directing his observations exclusively to taxing statutes, the learned author of “Construction of Statutes’, 2nd ed., (1983) at page 87, E.A. Driedger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

In Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3, (sub nom. Notre-Dame de Bon-Secours (Corp.) v. Québec (Communauté urbaine)) [1995] 1 C.T.C. 241, (sub nom. Corp. Notre-Dame de Bon-Secours v. Québec (Communauté urbaine)) 95 D.T.C. 5017, Mr. Justice Gonthier in delivering the judgment of the Court said at page C.T.C. 250 (D.T.C. 5022):

There is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text Construction of Statutes (2nd ed. 1983), Driedger fittingly summarizes the basic principles: “... the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”. The first consideration should therefore be to determine the purpose of the legislation, whether as a whole or as expressed in a particular provision.

Subsections 2(1), 3(1) and section 12 of the Interpretation Act provide:

2. (1) In this Act,

“Act” means an Act of Parliament;

“enactment” means an Act or regulation or any portion of an Act or regulation;

3. (1) Every provision of this Act applies, unless a contrary intention appears, to every enactment, whether enacted before or after the commencement of this Act.

12. Every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects. [4]

R. v. Trade Investments Shopping Centre Ltd., (sub nom. Canada v. Trade Investments Shopping Centre Ltd.), [1993] 2 C.T.C. 333, 93 D.T.C. 5486 (F.C.T.D.) [5] dealt with paragraph 13(21.1)(a) of the Act. Mr. Justice Noël said at page 334 (D.T.C. 5486):

The issue turns on the interpretation of transitional provisions applicable when the amendment to s. 13(21.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”), came into effect on May 9, 1985.

Before that amendment came into effect, it was in the interests of the seller of a commercial property, in the event that the buyer wished to undertake a new development, to demolish existing structures before selling the subjacent land. This enabled him to assign the building no value for the purposes of the transaction, to make all his profit in the form of a capital gain on the subjacent land and to set off against this gain the final loss made on the building at its demolition. The general effect of the amendment at issue here is to reduce the final loss realized on the building in such circumstances, as also where the building is demolished by the buyer soon after its purchase by taking into account its taxable value.

Subsections 7(3) and (6) of Statutes of Canada 1985, c. 45 read:

(3) Paragraph 13(21. l)(a) of the said Act is repealed and the following substituted therefor:

(It is unnecessary for the purposes of these reasons to reproduce the paragraph as amended.)

(6) Subsection (3) is applicable with respect to dispositions occurring after May 9, 1985 other than dispositions occurring pursuant to the terms of an agreement in writing entered into on or before that date.

On August 29, 1986 the sale of a shopping centre was concluded between Trade Investments Shopping Centre Ltd. and I.P.C.F. Properties Inc. This contract related to the exercise of an option in a lease entered into on August 31, 1961. Noël J. said at pages 3353-56 (D.T.C. 5488):

The only issue is whether paragraph 13(21.1)(a), which came into effect on May 9, 1985, is applicable to the transaction made on August 29, 1986 between I.P.C.F. Properties Inc. and the defendant. If so, the defendant conceded that the reassessment for its 1986 taxation year was valid. If not, the plaintiff admitted that its appeal should be dismissed.

The question presented is therefore whether the lease of August 31, 1961, and in particular the option conferred by it, can be regarded as an agreement in writing pursuant to the terms of which the disposition of the shopping centre occurred on August 29, 1986 within the meaning of the transitional provision.

His Lordship made these observations about legislation of the kind embodied in subsection 7(6) of the 1985 enactment at page 337 (D.T.C. 5488-89):

It is worth noting, to begin with, that transitional legislation is remedial in nature. In tax matters, its purpose is generally to protect taxpayers who have made certain dispositions in good faith in accordance with the law applicable at the time, by allowing them to be covered by the former law despite the coming into force of the new law.

Such provisions are necessary in tax matters since it is well established in this area that the state of the law confers no vested right tor subsequent years. In Gustavson Drilling (1964) Ltd. v. Minister of National Revenue, [1977] 1 S.C.R. 271, [1976] C.T.C. 1,75 D.T.C. 5451, the Supreme Court had to decide whether the right to make certain deductions conferred vested rights for subsequent taxation years. In deciding that it did not, Dickson J. stated, at pages 282-83 (C.T.C. 9, D.T.C. 5456) that:

No one has a vested right to continuance of the law as it stood in the past. ... A taxpayer may plan his financial affairs in reliance on the tax laws remaining the same; he takes the risk that the legislation may be changed.

The mere right existing in the members of the community or any class of them at the date of the appeal of a statute to take advantage of the repealed statute is not a right accrued....

Accordingly, when it sees fit, Parliament makes an exception to this rule by using transitional provisions to preserve the right of certain classes of taxpayers to be covered by the old law despite the new having come into effect. The scope of these transitional provisions will be more or less restrictive depending on the precise situation contemplated by the legislature in mitigating the effect of the new Act. Sometimes, Parliament will limit the protection of a transitional provision to taxpayers who have entered into firm and binding contracts based on the old law. At other times Parliament will extend this protection to taxpayers who can show that they had in view a transaction which was substantially advanced at the relevant time, though it had not yet been concluded.

Emphasis added.

and at pages 339-40 (D.T.C. 5491):

While it may be useful to compare various transitional provisions used by Parliament in tax legislation in order to determine their meaning, this must be done with great care. This is particularly true when one is trying to compare transitional provisions emanating from different budgets, as is the case here.

Transitional provisions do not lend themselves to the scrutiny of an overly strict interpretation. It should be borne in mind that transitional provisions are secondary and incidental to the provisions of substantive law which they accompany. Unlike taxing provisions, they are not adopted as part of a coherent legislative plan in which the provisions must interrelate with one another in a logical scheme. They are ad hoc provisions the sole purpose of which is to ensure that the particular provision of substantive law which they accompany is introduced in an equitable manner. By their very nature, therefore, they are likely to create discrepancies, and a review of the wording of these provisions in recent years indicates that each budget produces transitional provisions peculiar to it and designed without reference, or at least with little reference, to preceding in pari materia provisions. While a comparative analysis of such provisions remains useful, I do not think it can be conclusive in the case at bar.

and at page 341 (D.T.C. 5491):

In the case at bar it was established that the seller had undertaken, under the purchase option reflected in the lease of August 1961, to dispose of the shopping centre according to the terms of the option, and that this obligation was in effect at May 9, 1985. It was also established that the disposition was made in accordance with the terms of the purchase option. It is true that at May 9, 1985 the obligation to sell was subject to the beneficiary of the option choosing to take it up, but this does not in any way alter the fact that the obligation, as far as the seller was concerned, was absolute, irrevocable and irreversible. This is clear when one notes that the shopping centre was sold for a consideration of $3,000,000, the amount agreed to by the defendant in the purchase option, whereas at the time of the sale the shopping centre was worth $8 million. The only reason why the defendant sold the shopping centre for a price $5 million below its actual value was that it was contractually bound to do so.

I do not think that in the case at bar the word “agreement” can be interpreted so as to limit it strictly to a purchase/sale agreement. The defendant had irrevocably undertaken to make the sale at May 9, 1985, just as it would have been if it had been party to a purchase/sale agreement. From its point of view the contractual obligation was absolute, and the contractual obligation must be considered and the word “agreement” interpreted from its point of view. Taking this approach, it is clear that Parliament could not have intended to exclude from the benefit of the transitional provision a seller who had undertaken to sell by a written agreement solely on the ground that the other party to the contract had no corresponding obligation to buy at the relevant time. The transitional provision was enacted exclusively to protect a seller who had obligated himself to effect a sale under the old law, and the defendant was subject to this obligation pursuant to an agreement in writing which was in effect at May 9, 1985.

There is language in the reasons for judgment indicating that subsection 7(6) of the 1985 legislation required disposition pursuant to an agreement creating contractual obligations between or among the parties to it. Noël J. went on to find that the option in the lease was a “unilateral contract” that was in writing and in force on May 9, 1985. His decision implied that only agreements creating contractual obligations will be within the ambit of subsection 7(6). However, in the light of option in the lease, it was unnecessary for the purpose of deciding the Trade Investments Shopping Centre Ltd. case to determine whether agreements not creating contractual obligations, but leading directly to such agreements, complied with subsection 7(6). My views about such agreements in the context of subsection 26(5) follow.

Counsel for the appellant says that what occurred prior to December 4, 1985 created legal obligations in the sense that failure to proceed to a conclusion regarding the things then contemplated would give rise to legal liability on the part of a defaulting party. He places special emphasis on the First, Second and Third Letters. [6] I disagree with the construction placed on these documents by the appellant. They are merely instruments of negotiation and what was accepted by Lone Rock and its shareholders were negotiation proposals that were subject to the later creation of legal rights and obligations. Nor is this affected by the fact that in the Share Purchase Agreement signed on January 15, 1986 language is used that may be construed as suggesting something else. Clause l(a)(vii) of that agreement reads:

“Interim Agreement” means the agreement between Vendors and Purchaser constituted by Purchaser’s offer letter dated October 16, 1985, accepted October 25, 1985, the supplementary offer letter dated October 28, 1985, accepted October 29, 1985, and the letter agreement dated December 16, 1985 extending Closing Time.

This clause should be read in light of Ralli Brothers Ltd. v. Inland Revenue Commissioners, [1966] A.C. 483 where Lord Pearson said at page 515:

The substance and reality of the relevant transaction should be regarded: Earl Cowley v. Inland Revenue Commissioners, [1899] A.C. 198; In re Townsend, [1901] 2 K.B. 331; Adamson v. Attorney-General, [1933] A.C. 257. This does not mean that the courts should disregard a transaction because it was entered into for the purpose of eliminating or diminishing liability to estate duty. The meaning is that they can and should examine the transaction realistically for the purpose of ascertaining its true nature and effect.

What, then, is the object or purpose of subsection 26(5) of the 1986 statute? To my mind the answer is that if a taxpayer has expended time or money or both with the intention of relying on paragraph 98(5)(d) of the Act in conducting its affairs the repeal of the paragraph is not applicable where that intention is evinced by agreements in writing, not necessarily contractual in nature, entered into prior to December 4, 1985. [7] But those agreements must set in motion the taking of steps that lead directly to the making of agreements of the kind described in paragraphs 26(5)(a), (b) and (c) after that date that do give rise to contractual obligations. I do not think that reference to an agreement in legislation or in some other context means that the agreement must create contractual rights and obligations.

There is no evidence that the appellant underwent an acquisition of control over it at any time relevant to these appeals. That disposes of paragraph 26(5)(c) in its favour. [8]

Subject to the overriding issue of whether the appellant was at any time a partner in the partnership, in order to succeed in relation to paragraphs 26(5)(a) and (b), the appellant must establish these things which I think it has done:

I. that the property was received by it when it was a member of the partnership.

2. that the property was acquired by the partnership after December 4, 1985, but pursuant to an agreement in writing entered into before that date; and

3. that the property was received by the appellant in satisfaction of its interest in the partnership which interest was acquired after December 4, 1985, but pursuant to an agreement in writing entered into before that date.

I shall initially deal with these three points on the assumption that the appellant became a partner in the limited partnership on September 29, 1986. But I emphasize that what follows about these three points is subject to the overriding issue of whether that assumption is correct.

With reference to the first point, the appellant received the property on September 29, 1986 under the Distribution Agreements of that date between the Numbered Company as Transferor and the appellant as Transferee and between the partnership and the appellant.

Regarding the second point, the property was acquired by the partnership pursuant to agreements contained in the First Letter dated October 16, 1985 and in the Second Letter dated October 28, 1985 which should be read together. There is a clear nexus between those letters and the rollover agreement between Lone Rock and the partnership effective January 15, 1986. Under this agreement Lone Rock transferred all of its Canadian resource property and depreciable property to the partnership in return for a 99.99 per cent interest in that partnership. The property was, therefore, acquired by the partnership pursuant to agreements in writing entered into before December 4, 1985.

With reference to the third point, as indicated in respect of the first point, the appellant received the partnership property on September 29, 1986 under the Distribution Agreements of that date between the Numbered Company as Transferor and the appellant as Transferee and between the partnership and the appellant. It received this property in satisfaction of its interest in the partnership. This interest was acquired under the Distribution Agreement of September 29, 1986 between Lone Rock as Transferor and the appellant as Transferee. But the acquisition on September 29, 1986 can be said to have been made pursuant to the agreements in the First and Second Letters. There is a bridge between those letters and the agreements just mentioned.

Apropos the overriding issue, it is manifest on the face of paragraph 98(5)(d) of the Act and subsection 26(5) of the 1986 enactment that in order to succeed on these appeals partnership is a condition precedent. The question whether the appellant was a partner arose in this way. Prior to the commencement of the trial, counsel delivered to the Registrar for the use of the Court an Agreed Statement of Facts and a related Book of Agreed Exhibits consisting of some 22 documents. All of the documents already referred to in these reasons are in that book except the “NOTICE TO AMEND CERTIFICATE” (para. P(iii) supra). It was received by the Court after the trial with a supplementary written argument submitted by counsel for the appellant dated March 15, 1996. Prior to the trial, I perused the Agreed Statement of Facts and the book of exhibits. The precise manner in which the appellant became a partner not being apparent on the face of these documents, I raised a question in this regard at the commencement of the trial.

The Partnership Act of Alberta deals with limited partnerships in Part 2 thereof. Sections 49, 50, subsection 51(1), paragraph 51(2)(j), sections 64 and 65, paragraphs 69(1 )(b), (c), subsections 69(2), (3) and paragraph 71(a) of that Act provide:

49. In this Part “certificate’ means a certificate made under section 51 and includes a certificate that has been amended.

50(1) A limited partnership may, subject to this Part, be formed to carry on any business that a partnership without limited partners may carry on.

(2) A limited partnership shall consist of

(a) one or more persons who are general partners, and

(b) one or more persons who are limited partners.

(3) Notwithstanding section 7 of the Companies Act, there may be any number of limited partners in a limited partnership.

51(1) A limited partnership is formed when a certificate substantially complying with subsection (2) is filed and recorded in the Central Registry.

(2) A certificate shall be signed by all the persons desiring to form a limited partnership and shall state

(j) the right, if given, of the partners to admit additional limited partners,

64. After the formation of a limited partnership, additional limited partners may be admitted by amendment of the certificate in accordance with this Part.

65(1) A limited partner’s interest is assignable.

(2) A substituted limited partner is a person admitted to all the rights of a limited partner who has died or has assigned his interest in the limited partnership.

(3) An assignee who does not become a substituted limited partner has no right

(a) to require any information or account of the partnership transactions, or

(b) to inspect the partnership books,

but is entitled only to receive the share of the profits or other compensation by way of income, or the return of his contribution, to which his assignor would otherwise be entitled.

(4) An assignee may become a substituted limited partner

(a) if all the members (except the assignor) consent, or

(b) if the assignor, being so authorized by the terms in the certificate, gives the assignee that right.

(5) An assignee becomes a substituted limited partner when the certificate is appropriately amended in accordance with this Part.

(6) A substituted limited partner has all the rights and powers and is subject to all the restrictions and liabilities of his assignor, except those liabilities of which he was ignorant at the time he became a limited partner and which could not be ascertained from the certificate.

(7) The substitution of an assignee as a limited partner does not release the assignor from liability under sections 62 and 73.

69(1) A certificate shall be amended when

(b) a person is substituted as a limited partner,

(c) a person is added as a limited partner,

(2) The notice to amend a certificate shall

(a) set forth clearly the change in or addition to the certificate which is desired, and

(b) be signed by all the partners.

(3) A notice to amend a certificate by substituting a limited partner or adding a limited partner or general partner shall also be signed by the person to be substituted or added and, when a limited partner is substituted, the amendment shall also be signed by the assigning limited partner.

71. A certificate is cancelled or amended, as the case indicates, when there is filed with and recorded in the Central Registry

(a) a notice signed as required by this Part, or ...

The following occurred in this sequence. There is some minor repetition of what has already been said in what follows.

14 January 1986:

The Numbered Company and Lone Rock entered into a limited partnership agreement. The Numbered Company was the general partner and Lone Rock the sole limited partner. Clause 1.01 defines a number of words and phrases, including:

“Amended Certificate” means any notice to amend the Certificate filed pursuant to the Partnership Act’,

“Certificate” means the certificate of limited partnership as amended, filed and recorded in the Central Registry for the Province of Alberta and forming the Partnership pursuant to the Partnership Act;

“General Partner” means, at any particular time, the party or parties who have executed, and are bound by the terms of, this Agreement as general partners;

“Limited Partners” means, at any particular time, the party or parties who have executed this Agreement as limited partners or their transferees as permitted by this Agreement;

“Partner” means a General Partner or a Limited Partner;

The following clauses and subclauses relate to the issue at hand:

ARTICLE V

5.03 Filing of Amended Certificate

Forthwith upon the admission by the General Partner of Limited Partners, or upon any returns of capital pursuant to this Agreement, the General Partner shall file an appropriate Amended Certificate. Except as specifically provided in this Agreement, no Limited Partner shall be entitled to a return or to demand the return of any portion of his Capital Contributions to the Partnership. No Limited Partner shall be entitled to interest on any portion of his Capital Contributions to the Partnership.

ARTICLE VI

6.02 Term of Partnership

The Partnership shall be dissolved on December 31, 2050 unless dissolved earlier under the provisions of Article XIII.

ARTICLE XI

11.04 General Partner as Attorney

Each Limited Partner, and each person who is a transferee of a Unit and assignee of the interest of a Limited Partner as the holder of a Unit, hereby irrevocably nominates, constitutes and appoints the General Partner, with full power of substitution, as its agent and true and lawful attorney to act on its behalf with full power and authority in its name, place, and stead to execute, under seal or otherwise, swear to, acknowledge, deliver, make and file or record when, as and where required:

(a) this Agreement, the Certificate, any amendment to this Agreement or the Certificate or any other instrument required to qualify, continue and keep in good standing the Partnership as a limited partnership in or otherwise to comply with the laws of any jurisdiction in which the Partnership may be registered, carry on business or own property in order to establish or maintain the limited liability of the Limited Partners under such law, including any amendment to the Certificate necessary to reflect any change in the Partners or in the ownership of a Unit;

ARTICLE XII

12.01 Registrar

The General Partner may engage a registrar and transfer agent (the “Registrar”) for interests in the Partnership.

12.02 Register of Partners

It will be the duty of the Registrar to maintain a register of Partners of the Partnership showing their names and addresses, to record issues and permitted transfers of interests in the Partnership, and to carry out such other functions related to the registration and records of the Partnership as may be required.

12.04 Vacancy

The General Partner will carry out all the functions of the Registrar during any period for which no Registrar is engaged.

12.06 Transfer of Partnership Interests

The interest of any Partner in the Partnership shall be transferable. An instrument of transfer of such interest and power of attorney must:

(a) be executed by the assignor or any legal representative thereof and the assignee who must agree therein to be bound by the terms of this Agreement; and

(b) have the execution by the assignor or legal representative guaranteed by a Canadian chartered bank, a trust company qualified to carry on business in Canada, a member of the Investment Dealers Association of Canada, or a member of any recognized Canadian stock exchange or verified in some other manner acceptable to the Registrar.

12.07 Deemed Consent to Admission

Where an assignee is entitled to become a Limited Partner pursuant to the provisions hereof, all Partners will be deemed to consent to the admission of the assignee to the Partnership as a Limited Partner without further act of the Partners.

12.08 Recording of Transfer

The Registrar will record the transfer and the General Partner will amend or cause to be amended the Register and the General Partner will do all other things and make such filings and recordings as are required by law including the filing of an Amended Certificate.

12.09 Effectiveness Conditional

No transfer will become effective until the terms hereof have been complied with and all filings and recording have been made as required by the Partnership Act and other applicable legislation in respect of the admission of the assignee to the Partnership or the increase of his interest therein, as the case may be.

12.11 Effect of Transfer

A substituted Limited Partner shall, as between himself and other Partners, be bound by the provisions of this Agreement and stand in place and stead of the Limited Partner from whom the substituted Limited Partner derives his interest, as of and from the time of filing of an Amended Certificate in respect of such transfer.

ARTICLE XIII

13.01 Dissolution

The Partnership shall be dissolved on December 31, 2050, or shall be dissolved earlier upon the occurrence of any of the following events:

(c) the disposition of all or substantially all of the assets of the Partnership; or

(d) written consent of the General Partner and the affirmative vote of the Limited Partners given by an Extraordinary Resolution.

13.02 Effective Date of Dissolution

Dissolution is effective on the day on which the event giving rise to the dissolution occurs, but the Partnership will not terminate until the assets have been distributed and the Certificate has been cancelled.

Also on January 14, 1986, a certificate was signed pursuant to subsection 51(2) of the Partnership Act by the Numbered Company and Lone Rock. Paragraphs 3, 9, 12 read:

3. The name and place of residence of each Partner, both General and Limited, are as follows:

General Partner:

335827 Alberta Ltd. 1000, 610 - 8th Avenue S.W. Calgary, Alberta T2P 1G5

Limited Partner:

Lone Rock Resources Ltd. 1000, 610 - 8th Avenue S.W. Calgary, Alberta T2P 1G5

9. A Limited Partner has the right to transfer his Units but in doing so must comply with the provisions of Article XII of the Partnership Agreement.

12. No right has been given to admit additional Limited Partners.

On March 15, 1996 counsel faxed to the Registrar a supplementary argument dealing with the issue of partnership. Paragraph 3 thereof reads:

Therefore, on January 14, 1986, one of Lone Rock’s assets was a partnership interest in the Partnership. The parties are agreed that on September 29, 1986, Lone Rock transferred all of its assets to the Appellant. It therefore follows that the Appellant acquired a partnership interest in the Partnership. That the partnership interest was in fact transferred to the Appellant is confirmed by the fact that the directors of Lone Rock passed a resolution transferring all of the assets of the company to the Appellant and by the attached assignment of the partnership interest by Lone Rock to the Appellant (Exhibit A-1 to this letter). It is therefore submitted that upon acquiring the partnership interest, the Appellant became a partner of the Partnership. That the general partner and Bow River executed the attached Notice to Amend the Certificate confirms the intention of those two parties to continue the partnership with Bow River stepping into the place of Lone Rock.

The Notice to Amend the Certificate is included in these reasons under paragraph P(iii).

My understanding is that the position of the appellant comes down to this: the operative steps by which it became a partner all occurred on September 29, 1986 and consisted of the Resolutions of the Directors of Lone Rock approving the proposed Distribution Agreement between Lone Rock and the appellant and authorizing it to be executed by any one of the Directors; the Distribution Agreement entered into between Lone Rock as “Transferor” and the appellant as “Transferee” which provides: “The Transferor hereby assigns, transfers and conveys to and sets over unto the Transferee all of the right, title and interest of the Transferor in and to all its property, assets and business”; and the dissolution of Lone Rock under the Corporations Act. Of special importance is the clause just quoted that appears in the Distribution Agreement between Lone Rock and the appellant. It is to be noted that the first whereas clause in the Distribution Agreement between the partnership and the appellant reads: “WHEREAS effective September 29, 1986 Lone Rock Resources Ltd., the former sole limited partner of the partnership, was wound up into its parent, Bow River, which is now the sole limited partner”.

In my opinion the foregoing was insufficient to constitute the appellant a partner. Subsection 69(3) of the Partnership Act was not complied with. It requires that a notice to amend the certificate to substitute the appellant as a limited partner be signed by Lone Rock as the assigning limited partner. This was not done. Further, the Amended Certificate was not filed in the Central Registry as required under paragraph 71(a) of the Partnership Act. It must also be noted that the inference to be drawn from subsection 65(3) of the Partnership Act is that an assignment by a limited partner in a limited partnership of his interest therein does not, of itself, constitute the assignee a substituted limited partner.

Article XII of the partnership agreement deals with the transfer of partnership interests. Paragraph 12.06(a) required the instrument transferring Lone Rock’s interest in the partnership to the appellant to be executed by Lone Rock and the appellant “who must agree therein to be bound by the terms of this agreement”. Those quoted words were not complied with. There was also non-compliance with paragraph 12.06(b) in that the instrument of transfer did not have the execution by Lone Rock guaranteed by a Canadian chartered bank or other financial institution described in that paragraph. The Amended Certificate was not filed as required by 12.08. Further, 12.09 precluded Bow River from becoming a partner until the terms of Article XII were complied with and all filings required by the Partnership Act were made in respect of the admission of Bow River to the partnership.

In Canada, these compacted step by step agreements and other related legal measures are accepted as a proper method whereby taxpayers may arrange their business affairs in order to secure the best possible advantage under the Act. But it strikes me that if taxpayers are going to go down these very technical roads they must carefully comply with the letter of the law in respect of each step in the sequence and their failure to do so shall result in the scheme being devoid of legal effect. [9] Otherwise this kind of tax planning makes the desire for the result the overriding consideration. The steps taken are in large measure pure form. If the appellant had, for example, become a partner on September 29, 1986 its [10] existence in that capacity would have been measured at most in hours. On the date just mentioned and the following day, in addition to directors’ resolutions and the execution of a Notice to Amend the Certificate, we have three Distribution Agreements, the dissolution of two corporations and a limited partnership. All of the foregoing was interrelated and the purpose was simply to secure the bump afforded by paragraph 98(5)(d) of the Act.

Counsel for the appellant speaks of “implied waiver” in relation to the failure to comply with requirements of the partnership agreement. I do not think that in relation to the kind of tax planning under consideration legal requirements are to be regarded as having been waived by implication unless that is necessary in the face of clear evidence. Where, as here, the failure is equally attributable to oversight or some other cause it is unnecessary to imply waiver. Further, there being nothing to suggest that the matter of waiver was addressed by any director or officer of the corporations involved, that disposes of counsel’s reliance on section 21 of the Partnership Act. It provides:

21(1) The mutual rights and duties of partners whether ascertained by agree-

ment or defined by this Act may be varied by the consent of the partners.

(2) The consent may be either expressed or inferred from a course of dealing. [11]

The appeals are dismissed.

Appeal dismissed.