T-2724-73
Texaco Exploration Company (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Collier J.—Calgary, January 14-17
and June 18, 1975.
Income tax—Deductions—Plaintiff seeking to deduct
depletion allowance, including in "profits reasonably attribut
able to production" profits from gas plants—Minister con
tending that at certain stage "production" ceases and "pro-
cessing" begins—At what stage should "production profits" be
computed—Branch tax—Whether Regulation 802(2) ultra
vires, or too restrictive in its definition of "capital invest-
ment"—Income Tax Act, R.S.C. 1952, c. 148, ss. 11(1 )(b9 and
110s(1) and Regs. 808(2), 1200 and 1201.
Plaintiff, an oil and gas exploration and production company,
sought to deduct depletion allowance, including in its "profits
reasonably attributable to production" the aggregate of profits
from all of its gas plants but one. The Minister argued that at a
certain point "production" ceases and "processing" begins, and
that processing profits are excluded in calculating depletion
allowance. Secondly, in the years 1964-67, a number of proper
ties acquired by plaintiff before January 1961 were surrendered
or abandoned, and plaintiff received nothing. Relying on Regu
lation 808(2) in calculating allowance to plaintiff in respect of
net income in capital investment in property, the Minister
deducted the value of the properties, resulting in a decrease in
net capital investment. Plaintiff attacks regulation 808(2) as
ultra vires and inconsistent with section 110B(1) of the Act.
Held, the appeal is dismissed. The assessment in respect of
depletion allowance is referred back to the Minister, and the
branch tax appeal is dismissed. The "production of oil [gas]"
means the bringing forth, or into existence and human realiza
tion, from underground, a basic substance containing gas and
other matter. Production of gas ceased at the well-head, or, at
the upstream side of any separator. While it may be more
convenient to determine production profits at the downstream
side of the inlet separator (as claimed by defendant), or at the
fractionation point (as argued by plaintiff), convenience, or
ease of calculating cannot influence the meaning. The drafters
had this imprecision in mind when they used the words "rea-
sonably attributable to". As to the "branch tax", the regula
tion (808(2)) is intra vires section 11OB(1)(b)(iii) of the Act.
The power to define the amount of the allowance is unrestrict
ed. As to plaintiff's alternative claim, that, even if intra vires,
the Regulation should be interpreted to exclude "irrelevant
surrenders of worthless lands" and would not eliminate true
increases in capital investment thereby nullifying the statutory
intent, such an interpretation of regulation 808(2) would
destroy its plain meaning.
Home Oil Company Ltd. v. M.N.R. [1955] S.C.R. 733 and
M.N.R. v. Imperial Oil Ltd. [1960] S.C.R. 735, applied.
INCOME tax appeal.
COUNSEL:
R. A. F. Montgomery and M. A. Carten for
plaintiff.
B. J. Wallace and L. P. Chambers for
defendant.
SOLICITORS:
MacLeod, Dixon, Calgary, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
COLLIER J.: The plaintiff (Texaco) appeals re
assessments by the Minister of National Revenue
of its income tax for the years 1964 to 1967
inclusive. There are two issues. The first is as to
the amount of depletion allowance which Texaco is
entitled to deduct, pursuant to paragraph 11(1) (b)
of the Income Tax Act' and sections 1200 and
1201 of the Regulations. The second issue is as to
the calculation of the amount of "branch tax"
Texaco should pay for the years in question by
virtue of subsection 11 OB(1). Specifically, the
plaintiff contends subsection 808(2) of the Regula
tions is ultra vires, or so restrictive in its definition
of "capital investment of the taxpayer in property"
as to render nugatory those words "capital invest
ment" set out in subparagraph 110s(1)(b)(iii).
I go to the first issue. Texaco (a non-resident
corporation) describes itself in the amended state
ment of claim as in the business of oil and gas
exploration and production with its principal office
in Calgary, Alberta. The defendant admits those
facts. For the taxation years in question Texaco
i R.S.C. 1952, c. 148 and amendments up to and including
1967: the so-called "old Act."
sought to 'deduct depletion allowance "calculated
on the basis of including in the profits reasonably
attributable to production the aggregate of the
profits from the entire operations of the gas plants
in which the plaintiff had an interest, except for
the portion of such profits related to fractionation
in the Bonnie Glen gas plant." 2 The defendant
admits Texaco endeavoured to calculate the
deduction in the manner stated. The Minister con
tends that "production" of oil, gas, and derivatives
in the plaintiff's plants ceased at a certain point
and "processing" commenced; profits derived from
"processing" the oil or gas were not profits "rea-
sonably attributable to the production" of oil or
gas' and are therefore excluded in the calculation
of the amounts deductible as depletion allowances.
It is convenient, at this juncture, to set out the
relevant provisions of the Act and Regulations.
11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a taxation
year:
(b) such amount as an allowance in respect of an oil or gas
well, mine or timber limit, if any, as is allowed to the
taxpayer by regulation;
The following portions of the Regulations are
reproduced as they read for the years in question
(1964-1967).
Income Tax Regulations.
1200. For the purpose of paragraph (b) of subsection (1) of
section 11 of the Act there may be deducted in computing the
income of a taxpayer for a taxation year amounts determined
as hereinafter set forth in this Part.
1201. (2) Where a taxpayer operates one or more resources,
the deduction allowed is 33 1 / 2 % of
(a) the aggregate of his profits for the taxation year reason
ably attributable to the production of oil, gas, prime metal or
industrial minerals from all the resources operated by him,
minus
1201. (5) For the purpose of this section,
2 The quoted words are taken from paragraph 2 of the
amended statement of claim.
3 My underlining.
(d) profits reasonably attributable to the production of oil or
gas from a well or bituminous sands deposit shall not include
profits derived from transporting or processing the oil or gas;
(/) "production profits" in relation to a taxpayer means the
aggregate of his profits reasonably attributable to the pro
duction of oil, gas, prime metal or industrial minerals from
all of the resources operated by him. 4
The method of calculation used by the plaintiff
in its returns is the method which had been agreed
upon in 1964 between Texaco and the National
Revenue authorities in Calgary. The parties loose
ly called the point where production profits ceased
the "fractionation point." The method was par
ticularly applicable to Texaco's Bonnie Glen gas
plant, where there was in fact a fractionation
unit.' At that stage, butane and propane (liquefied
petroleum gases—L.P.G.'s) were removed from
the substance 6 passing through the plant.
On this appeal, Texaco upholds the "fractiona-
tion" point calculation as an alternative, but
argues that in the true meaning to be given to
"production", production of gas ceased not at the
plant outlet where L.P.G's were removed, but at
the final outlets in the plants where "sales" gas
was sold, or made marketable, or in some cases
was fed directly into pipelines (the point at which
"transporting"' could be said to begin).
The revenue authorities in 1966 began to have
doubts about the "fractionation" formula, and a
new one was proposed. The re-assessments in liti-
4 This paragraph did not come into the Regulations until
1969. It is applicable to the 1969 and subsequent taxation
years. I have merely included it here for reference purposes.
5 The point marked C on Exhibit 10.
6 At this point in these reasons I have deliberately used the
word "substance" rather than "well effluent" or "raw" or
"wet" gas. I am here merely trying to describe, in order to
make the issues intelligible, the various points in passing the
"substance" through the plant at which it was or might be
contended "production" ceased.
7 Paragraph 1201 (5)(d) of the Regulations.
gation here depict the Minister's formula: produc
tion of gas ceases at the point where marketable oil
is separated or extracted from the effluent from a
gas or oil well. In the case of Texaco, the Minister
says that production of gas in its plants ceases at
the outlet where oil is drawn. off—at "the down
stream side of the inlet separators" 8 in the plain
tiff s plants. Generally speaking, and somewhat
hypothetically, for the purposes of this particular
case the inlet separator is the first piece of equip
ment or phase in the gas plant. through which the
substance, obtained from underground in the oil or
gas field, passes. The Minister's contention, in
essence, is that at that point production of oil or
"gas" has ceased, processing has begun, and only
the profits up to that point or stage are to be
included in the calculation of depletion allowances.
So far, then, one of three points is urged as the
stage at which "production profits" are to be
computed. In my view there is a fourth position
open in respect of the operations carried on by
Texaco and described in the evidence in this case.
It is that the profits from production cease once
the oil or gas has been extracted from the well. In
the operations carried on by Texaco, the cut-off
point (for calculation of depletion allowances), on
that interpretation, would be for practical purposes
at the well-head, and at the well side (upstream) of
any separator, be it an inlet separator in the plants,
or a field separator in the field itself.
To appreciate fully the four possibilities as to
where production ceases and processing or trans
porting begins the facts must be reviewed in more
detail. The evidence in this case came mainly from
well qualified engineers, all with experience in the
oil and gas industry. Their testimony and opinions
were based on the way in which Texaco carried on
its resource operations in the years in question, the
usual methods of operation carried on generally in
the gas and oil industry, plus, of course, their own
personal experience and opinions.
e The "plant" side (as opposed to the "well" side) of the
"separator" and "inlet separator" marked on Exhibit 10. Also,
the "plant" side of the inlet separator shown on the schematic
diagram of Texaco's Bonnie Glen plant (Exhibit 3.), of its
Cynthia plant (#2 on Exhibit 4, and Exhibit 5.) and of its
Willesden Green plant (Exhibit 6).
At the material times, Texaco operated or had
an interest in approximately 20 gas plants. These
plants were located in oil or gas fields in which
Texaco and others had explored for, found, and
developed wells which delivered substances from
the ground from which oil, natural gas, and other
saleable products are recovered. In some oil and
gas fields there are field separators at or near the
well heads. The substance from the well is put
through the field separator. At that stage, oil is
separated from the rest of the effluent. The
remainder of the effluent is then taken to a plant
such as those operated by Texaco. The first stage
there through which the effluent passes is the inlet
separator which I have earlier referred to. More oil
may be drawn off at this point. The remainder of
the effluent continues through the plant where
L.P.G.'s, pentanes + and sales gas or marketable
gas are at various outlets, drawn off. Sulphur, as
well, may be extracted.
In most oil and gas fields (certainly most gas
fields) there is no field separator. The effluent,
now outflowing from its source in the earth, is
taken to the plant. The main portion of the crude
or marketable oil is extracted or removed from the
effluent at the inlet separator stage. The remains
of the effluent stream follow the same course I
have previously described.
The plaintiff called two experts, both very com
petent and very experienced. They described in
detail the steps I have sketchily outlined above. In
their view the effluent, before it passes through the
field separator or the inlet separator, is not a
marketable product. 9 When the oil is taken off at
the inlet separator stage the oil is, generally speak
9 Texaco, at times, purchased effluent or raw gas from other
operators who owned wells in the same field. The raw gas or
effluent was transported to Texaco's gas plants, and put
through the separating procedures described. The price paid by
Texaco to the vendors was dependent on Texaco's sale price, at
any particular time, at the outlets. At first glance it would
appear those well operators who sold the effluent or raw gas to
Texaco ceased "production" when they had extracted the efflu
ent from the ground or delivered it to Texaco. There may,
however, be other facts (not in evidence at this hearing) which
could lead to a different conclusion.
Mr. Ross, called by the defendant, described the operations
of Production Operators Ltd., of Saskatchewan, which owned
gas decompression and dehydration facilities (a gas plant). The
company did not own or operate wells. It installed the gathering
ing, after removal of additional water, up to
specifications and therefore marketable. The re
maining effluent according to them is not market
able until it has gone through further operations.
These succeeding stages are, in their view, essen
tially production steps. They described them as the
separation out of contaminants, L.P.G's, pentanes
+ and water. The final substance is sales gas or
marketable gas. This separation is not, in their
opinion, "processing" of gas. I think their profes
sional view can be summarized as follows: in the
Texaco plants (and in gas plants generally) a
mixed well effluent stream is passed through the
facility; by a series of simple separations, impuri
ties are removed in order to produce a string of
saleable or marketable products. From the time
the effluent goes through the field separator or
inlet separator until it reaches the various sales
outlets (as shown for example on Exhibit 10),
there is no molecular change. The equally com
petent expert called on behalf of the defendant
agreed no molecular change occurs.
Dr. Lacey and Mr. Welch (the plaintiff's expert
witnesses) take the view that for there to be pro
cessing there must be molecular change. They give
as examples of processing in the petroleum indus
try plants which, from oil, produce tile and other
petro-chemical materials. There molecular
changes have taken place. Certain materials such
as ammonia and fertilizer can be made from gas.
This, say the plaintiff's witnesses, is done by
facilities and the plant. It gathered and compressed the effluent
and delivered the sales gas for the well owners and operators. It
did not purchase the effluent. It merely charged a fee for the
services rendered. Again, it would, at first sight, appear (on the
skeletal facts in evidence) that company was not "producing"
gas. There may be other facts, however, which could change
that tentative opinion.
Effluent from a well-head is therefore, in a certain context,
in fact marketable. It can be purchased (Texaco), or handled
and serviced (Production Operators Ltd.). Dr. Lacey and Mr.
Welch (for the plaintiff) used the term marketable in the sense
that, until the effluent had passed through the separating
procedures at the plant, it had not become gas unless it met
specifications of the purchasers, such as pipeline transmission
companies, or the standards or qualities set by governments.
molecular change. In their view it is "processing"
of gas, in the true and correct technical sense.
Mr. Ross, for the defendant, expressed his
professional opinion that according to common
usage in the oil and natural gas business in
Canada, the word "processing" covers the things
done to the effluent once it is brought into a gas
plant. Production, in his view, ceases at the down
stream side of the inlet separator.' Dr. Lacey and
Mr. Welch, on the other hand, assert production
ceases only at the sales outlets.
Expert opinions such as those given by these
three gentlemen are, of course, very helpful. In this
case they point up, at the same time, an apparent
difference of view in the oil and gas industry as to
the meaning of "production". My problem is,
unfortunately, not to decide which of the two
professional views is, in the industry and profes
sions, the better one. It is to determine what the
legislators meant by the words "profits reasonably
attributable to the production ..." as they appear
in Regulation 1201(2)(a).
I think it convenient to review some of the
legislative history. The Income War Tax Act pro
vided for an exhaustion allowance or deduction as
the Minister might deem fair and just (paragraph
5(1)(a)). There was no mention of profits from
production as the basis for calculation. The 1948
Income Tax Act, 10 paragraph 11(1) (b) provided
for the deduction of "... such amount as an
allowance in respect of an oil or gas well ... as is
allowed to the taxpayer by Regulation ...." Sec
tion 1201 (Part XII) of the S. and R. Consolida
tion of 1949 authorized an allowance of 33 1 / 3 % of
the "... profits ... reasonably attributable to the
production of oil or gas from the well." Effective
September 22, 1954 the former Part XII was
revoked and new regulations substituted. The ma
terial parts of Regulation 1201(1) authorized a
deduction of "33 1 / 2 % of . .. the aggregate of the
profits ... reasonably attributable to the produc
tion of oil, gas ... from such wells ...." Part XII
was re-enacted once more (P.C. 1957-1718 dated
December 23, 1957). The relevant parts of Part
XII in force during 1964 to 1967 are the same as
10 S.C. 1948, c. 52.
those enacted in 1957. I have set them out earlier
in these reasons. The expression "production prof
its" did not find its way into the Regulations until
1969.
The defendant, in support of its contention that
the separating functions performed in the gas
plants were processing rather than production,
relied on definitions found in the Alberta Oil and
Gas Conservation Act", particularly those relating
to "gas."
From the 1957 statute, I extract the following:
"gas" means natural gas both before and after it has been
subjected to any processing, and includes all fluid hydrocarbons
not defined as oil;
"oil" means crude oil and all other hydrocarbons, regardless of
gravity, that are or can be recovered in liquid form from a pool
through a well by ordinary production methods;
"processing plant" means any plant for the processing of gas
produced from more than one well for the extraction from the
gas of hydrogen sulphide, water vapour, natural gasoline, other
hydrocarbons or other substances;
In the 1963 amendments, the following defini
tions appear:
"condensate" means a mixture mainly of pentanes and heavier
hydrocarbons that may be contaminated with sulphur com
pounds, that is recovered or is recoverable at a well from an
underground reservoir and that is gaseous in its virgin reservoir
state but is liquid at the conditions under which its volume is
measured or estimated;
"crude oil" means a mixture mainly of pentanes and heavier
hydrocarbons that may be contaminated with sulphur com
pounds, that is recovered or is recoverable at a well from an
underground reservoir and that is liquid at the conditions under
which its volume is measured or estimated, and includes all
other hydrocarbon mixtures so recovered or recoverable except
raw gas or condensate;
"gas" means raw gas or marketable gas or any constituent of
raw gas, condensate or crude oil that is recovered in processing
and that is gaseous at the conditions under which its volume is
measured or estimated;
"marketable gas" means a mixture mainly of methane originat
ing from raw gas, if necessary through the processing of the
raw gas for the removal or partial removal of some constituents,
and which meets specifications for use as a domestic, commer
cial or industrial fuel or as an industrial raw material;
1 S. Alta. 1957, c. 63 as amended by S. Alta. 1963, c. 42.
"natural gas liquids" means propane, butanes or pentanes plus,
or a combination of them, obtained from the processing of raw
gas or condensate;
"oil" means condensate or crude oil, or a constituent of raw
gas, condensate or crude oil that is recovered in processing, that
is liquid at the conditions under which its volume is measured
or estimated;
"pentanes plus" means a mixture mainly of pentanes and
heavier hydrocarbons which ordinarily may contain some
butanes and which is obtained from the processing of raw gas,
condensate or crude oil;
"processing plant" means a plant for the extraction from gas of
hydrogen sulphide, helium, ethane, natural gas liquids or other
substances, but does not include a well head separator, treater
or dehydrator;
"raw gas" means a mixture containing methane, other paraffin-
ic hydrocarbons, nitrogen, carbon dioxide, hydrogen sulphide,
helium and minor impurities, or some of them, which is recov
ered or is recoverable at a well from an underground reservoir
and which is gaseous at the conditions under which its volume
is measured or estimated;
"separator" means an unfired apparatus specifically designed
and used for separating gas and water from condensate or
crude oil, but does not include a dehydrator;
The definitions in the Alberta legislation are of
some assistance but they cannot be conclusive as to
the meaning of the words "gas" or "production" or
"processing" as used in the federal regulations in
effect during the years under scrutiny here. I think
one can say that if the general tenor of the Alberta
Oil and Gas Conservation Act definitions were
imported into Part XII of the Income Tax Regu
lations, the procedures carried out in the Texaco
plants could not be said to be "production" of
gas.' 2 The purpose of the Alberta legislation was,
however, quite different from the taxing purposes
(and allowances) of Part XII of the Regulations.
Some of the other provinces have statutes and
regulations concerning oil and gas activities. Their
definitions of terms similar to those in the Alberta
statute vary." The purpose or object of each stat
ute must be, as well, kept in mind.
12 A number of the definitions found in the Alberta legisla
tion were put by the defence to witnesses for the plaintiffs.
Most of them were from the 1963 amendments. Part XII of the
Income Tax Regulations (applicable to the taxation years here)
was enacted in 1957. If the drafter of the federal regulations
had any provincial usages or statutes in mind at all, it could
only be the relatively few definitions in the 1957 Alberta Act.
13 I have not traced the legislation in other provinces back to
1957. I merely list the present statutes as illustrations of
I go back to the language used in paragraphs
1201(2)(a) and 1201(5) (d) of the Regulations.
Applying it to this plaintiff and this case, the
allowable deduction (1201(2)(a)) is calculated on
the, profits reasonably attributable to "the produc
tion of Ethel oil ... [and] ... gas ..: from .. . the
resources [oil or gas wells] ... operated by [Tex-
aco]." I note the language in the first paragraph
referred to does not specifically include gas plants
in the meaning of "resource". In my view, plants
such as those operated by Texaco, are not included
by implication in resource, or oil or gas wells.
When one is dealing with particular resources
described as oil or gas wells, or bituminous sands
deposits, paragraph 1201(5)(d) must be con
sidered. Again applying it to this plaintiff and this
case, the profits referred to must be reasonably
attributable to "... the production of oil or gas
from ... [the wells]." There is no reference to
production of gas from or by means of gas plants.
Again, I do not think the language used is capable
of the inclusion of plants, by the test of plain
ordinary meaning, or by necessary implication.
In my opinion, the "production of oil [or] gas",
in this suit, means the bringing forth, or into
existence and human realization, from under
ground, a basic substance containing gas, and at
the same time, other matter. Whether it is basical
ly oil or basically gas that is discovered and
brought forth, or whether it is an oil well as
distinguished from a gas well, is, I think, perhaps a
matter of measurement, or the bestowing of a
sensible appellation on the particular substance
variations in the legislative meaning to be given to many terms
in the oil and gas business.
Oil and Gas Conservation Act, R.S.A. 1970, c. 267 and amend
ments. (The definitions in the revision are substantially the
same as those in the 1963 amendments.) Petroleum and Natu
ral Gas Act, S.B.C. 1965, c. 33 and amendments. The Mines
Act, R.S.M. 1970, c. M.160 and amendments. Oil and Gas
Conservation Act, R.S.S. 1965, c. 360 and amendments. Oil
and Gas Conservation Regulations, 1969 (Sask.) and amend
ments. Petroleum and Natural Gas Regulations, 1969 (Sask.)
and amendments. Petroleum Resources Act, S.O. 1971, c. 94
and amendments. Ontario Energy Board Act, R.S.O. 1970, c.
312 and amendments.
For examples of Federal legislation, see: National Energy
Board Act, R.S.C. 1970, c. N-6 (particularly the French and
English definitions of "gas").
(be it energy, or fuel, or something else) or source,
which, or from which, the substance is recovered in
the largest relative volume.
Counsel have not been able to refer me to any
previous decisions of real assistance on the inter
pretation of these particular words in Regulation
1201. I, too, have been unable to find any cases. In
Home Oil Company Ltd. v. M.N.R. 14 Regulation
1201 as it read in 1949 and 1950 was under
consideration. The words "profits ... reasonably
attributable to the production of oil or gas ....."
were in the Regulation. The Supreme Court did
not have to deal with the particular point before
me, but Rand J. did refer to "producing" wells in
contradistinction to non-producing wells or dry
holes. In the subsequent case, M.N.R. v. Imperial
Oil Ltd. 15 (where the words quoted were carried
into the regulations applicable to 1951) Martland
J., dissenting in part, said at page 760:
The purpose of s. 11(1)(b) of the Act is to provide a
depletion allowance in respect of a wasting asset, one such asset
being oil or gas produced from an operating well. Under
Regulation 1201, in the case of an oil or gas well, such
allowance is determined on the basis of a percentage of the
profits reasonably attributable to the production of oil or gas
from such a well.
As I see it, the purpose of subs. (5) of Regulation 1201 is to
require that, in computing the profits attributable to the pro
duction of oil or gas from operating wells, account must be
taken of any amounts expended for exploration and drilling in
relation to such wells, which have been included in the aggre
gate of costs deducted by a taxpayer in computing income
under the authority of s. 53.
In the Imperial Oil case, as in the Home Oil
case, the Court was not called on, nor was it
attempting to interpret "production of oil or gas."
While the language employed in those two deci
sions cannot be said to be authority for the mean
ing of "production" which I have ventured, it lends
some weight to the popular usage of "production"
in the sense of bringing in a successful well,
obtaining from underground pools or reservoirs
commercially marketable (at some stage) oil or
gas, as opposed to water or nothing.
14 [1955] S.C.R. 733.
u [1960] S.C.R. 735.
On this first issue I conclude, therefore, that
production of gas by Texaco ceased at the well-
head, or to put it another way, at the upstream
side of any separator, be it a field separator, or an
inlet separator in Texaco's gas plants.
My conclusion may, for all I know, cause dif
ficulty in precise calculation of profits. 16 It may be
more convenient, and easier from an arithmetic
point of view, to determine the profits attributable
to production at the downstream side of the inlet
separator (as contended by the defendant) or at
the fractionation point or, alternatively, the sales
outlets (as contended by the plaintiff). Conve
nience or ease in making arithmetical calculations
cannot, however, influence the meaning to be
assigned to the phrase here in controversy. It
seems to me the drafter of the regulation had that
imprecision of calculation in mind when he
described the profits as "reasonably attributable
to". (My underlining).
The second issue, as I have recounted, is con
cerned with the calculation of the amount of
"branch tax" the plaintiff should pay. The relevant
section of the statute is subsection 110s(1):
110e. (1) Every non-resident corporation carrying on busi
ness in Canada at any time in a taxation year shall, on or
before the day on or before which it is required to file a return
of income under Part I for the year, pay a tax equal to 15% of
the amount by which
(a) its taxable income earned in Canada for the year deter
mined in accordance with Division D of Part I,
exceeds
(b) the aggregate of
(i) the tax payable by it under Part I for the year,
(ii) any income taxes payable by it to the government of a
province in respect of the year, to the extent that such
taxes were not deductible under Part I in computing its
income for the year from the businesses carried on by it in
Canada, and
(iii) such amount as an allowance in respect of net
increases in its capital investment in property in Canada as
is allowed by regulation.
Subparagraph (iii) is particularly material.
16 I have not overlooked the words of Judson J. at page 749 of
the Imperial Oil Ltd. case:
No company makes an actual profit merely by producing oil.
There is no profit until the oil is sold.
In this case the problem arises by virtue of
subsection 808(2) of the Regulations which pur
ports to define "capital investment" of a taxpayer
in property at a particular time. I set out only the
relevant portion:
808. (2) For the purposes of this section, "capital invest
ment of the taxpayer in property" at a particular time means
an amount equal to the aggregate of
(a) the aggregate of the undepreciated capital cost to the
taxpayer of depreciable property of each prescribed class at
that time,
(b) the cost to the taxpayer of land (except land the cost of
which is or was deductible in computing the taxpayer's
income or land that is included in the taxpayer's inventory),
owned by it at that time that is not depreciable property, and
(e) the capital cost to the taxpayer of depreciable property
owned by it at that time that is not included in paragraph
(a), in respect of which a deduction has been allowed under
Part XVII,
Paragraph (b) is particularly material.
Before January 1, 1961 and up to December 31,
1967 the plaintiff had acquired oil and gas proper
ties at considerable cost. In the years 1964 to 1967
inclusive a number of those oil and gas properties
had been surrendered to their owners or aban
doned. The plaintiff received nothing on the sur
render or abandonment. For the taxation years in
question the Minister, in calculating the allowance
to the plaintiff in respect of net increases in its
capital investment in property, deducted the value
of the abandoned or surrendered properties. The
result of that treatment was to decrease the plain
tiffs net capital investment at the material times.
The Minister relied on Regulation 808(2) in sup
port of his view. The plaintiffs main attack on the
Minister's position is that Regulation 808(2) is
ultra vires because it is inconsistent with the intent
of subsection 110B(1). In my view this objection is
conclusively met by the decision in M.N.R. v.
Imperial Oil Ltd. " In that case it was argued that
the Regulation determining the amount of deduct
ible depletion allowance was not authorized by the
statute and therefore ineffective. Judson J. in ren
dering the judgment of himself, Taschereau and
Locke approved the reasoning of the trial court as
follows at pages 743-744:
17 [1960] S.C.R. 735.
Consequently, it is argued, subs. (4) of the 1951 regulation, in
purporting to require the deduction of the aggregate of losses
reasonably attributable to the production of oil or gas from all
wells operated by the taxpayer from the profits referred to in
subs. (1), is not authorized by the Statute and is ineffective.
This argument was rejected in the following passage of the
reasons for judgment of the learned President ([1959] C.T.C.
at p. 50):
The power to enact a regulation determining the amount
of the deductible allowance permitted by Section 11(1)(b) of
the Act and the base for its computation was granted in the
broadest terms and I cannot see any limitation of it such as
counsel suggests. The section of the Act does not specify
what the base for the computation of the allowance should be
or its amount. Thus, it was permissible to fix the profits
reasonably attributable to the production of oil or gas as the
base for the computation of the allowance and 33 1 / 2 per cent
of such base as its amount, as subsection (1) did. But it was
also permissible to define such profits for application in cases
where a taxpayer operated more than one well and some of
the wells were loss producing, even if such definition altered
the base fixed by subsection (1), as subsection (4) did. It
contains a statutory definition of the profits referred to in
subsection (1) for use in the cases stated in it. I see no
objection to such a definition for use in the circumstances
specified. In my opinion, subsection (4) is within the author
ity of Section 11(1)(b) of the Act. That being so, it is
unnecessary to consider the question of its severability.
I agree with this in full and have nothing to add.
Ritchie and Cartwright JJ. (dissenting in part)
concurred on this point at page 756.
In my opinion the impugned Regulation here is
intra vires subparagraph 110B(1)(b)(iii). The
power to define the amount of the allowance is
unrestricted.
Alternatively, the plaintiff contends that if the
Regulation is held to be intra vires then the Regu
lation should be interpreted to mean that in cal
culating a net increase in capital investment the
ultimately surrendered lands should not be part of
the initial year-end base balance and therefore not
a part of the assets in any later years. It is said this
interpretation would exclude "irrelevant surren
ders of worthless lands" and "would not have the
effect of eliminating true increases in capital
investment and thereby nullifying the statutory
intention."
While the interpretation sought is ingenious,
and has a certain amount of attraction, it necessi
tates, in my view, reading into Regulation 808(2)
some language which is not there. The plaintiff
would seek to add to paragraph (b) words so it
would read (in effect) "the cost to the taxpayer of
land[s] owned ... by it at that time that were also
owned at the end of 1960." In my view the words
in paragraph (b) are plain and unambiguous and
must be given their ordinary meaning. The inter
pretation sought by the plaintiff would destroy the
plain meaning of that paragraph.
The appeal in respect of the branch tax issue is
therefore dismissed.
In the result therefore the action by the plaintiff
is dismissed. The assessment by the Minister of
National Revenue for the years in question is
referred back to the Minister for re-assessment, in
respect of depletion allowances, on the basis set
out in these reasons. The substantial success is that
of the defendant. She is entitled to her costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.