T-3595-76
Spur Oil Ltd. (formerly Murphy Oil Quebec Ltd.)
(Plaintiff)
v.
The Queen (Defendant)
Trial Division, Gibson J.—Calgary, October 22,
23, 24 and 25, 1979; Ottawa, February 22, 1980.
Income tax — Income calculation — Associated companies
— Deductions — Artificial transactions — Plaintiff entered
into an agreement with an off-shore Bermuda corporation to
purchase crude oil at $0.27 per barrel more than what plaintiff
had been paying previous supplier — Bermuda corporation
also entered into a subcharter of affreightment with plaintiff,
and a crude oil sales agreement with plaintiffs previous
supplier — All acts of management and control of Bermuda
corporation were exercised elsewhere than in Bermuda —
Defendant alleged that plaintiff and Bermuda corporation
were not dealing at arm's length — Whether above three
agreements were artificial transactions — Appeal from Minis
ter's disallowance of increased expenses dismissed — Income
Tax Act, R.S.C. 1952, c. 148, s. 137.
Appeal by Spur Oil Ltd. from its 1970 income tax assess
ment wherein expenses consisting of $0.27 U.S. per barrel
times the number of barrels of crude oil purchased from
Tepwin Company Limited, an off-shore Bermuda corporation
acquired by Murphy Oil Company Ltd., plaintiff's parent
company, were disallowed. The $0.27 represents the difference
between the price per barrel charged by Murphy Oil Trading
Company, a wholly owned subsidiary of Murphy Oil Corpora
tion (also Murphy Oil Company Ltd.'s parent company), pur
suant to a 1968 agreement, and the price per barrel charged by
Tepwin, pursuant to a 1970 sales agreement. In addition to the
sales agreement, Tepwin entered into a subcharter of affreight-
ment with Spur Oil Ltd., and a crude oil sales agreement with
Murphy Oil Trading Company. All acts of control and man
agement of Tepwin were done elsewhere than in Bermuda.
Tepwin paid most of its 1970 net profits to its parent company
as tax-free dividends. The Minister alleges that Spur Oil Ltd.
carried on business through Tepwin in order to artificially
increase the expenses of Spur Oil Ltd. while enabling the
resulting cash flow to be returned to the Canadian parent. It is
further alleged that Spur Oil Ltd. and Tepwin were not dealing
at arm's length and therefore purchases of crude oil from
Tepwin made at a price in excess of the fair market value
should be deemed to have been made at the fair market value.
The issues are whether the following agreements were artificial
transactions within section 137 of the Income Tax Act, R.S.C.
1952, c. 148: the subcharter of affreightment between Tepwin
and Spur Oil Ltd.; the 1970 sales agreement between Spur Oil
Ltd. and Tepwin; and the 1970 agreement whereunder Tepwin
purchased crude oil at a purported fair market value from
Murphy Oil Trading Company.
Held, the appeal is dismissed. Such a determination must be
based on either (1) the residence of Tepwin and what it did at
the material times; or (2) the validity or not of the 1968
agreement between Spur Oil Ltd. and Murphy Oil Trading
Company or (3) both bases. The following categories of artifi
cial transactions have been considered by the courts: some
transactions that are not at arm's length, in which case prima
facie, the conclusion is that such transactions are artificial; and
some transactions that are entered into by off-shore corpora
tions where the management and control is elsewhere than in
such off-shore locations, in which case prima fade, the conclu
sion is that the transactions entered into by such off-shore
corporations are artificial. The evidence established that the
management and control of the off-shore corporation Tepwin
was not in Bermuda. And instead of evidence being adduced to
rebut the prima facie conclusion arising from that fact, the
evidence adduced established conclusively that the management
and control of Tepwin was divided between the United States
and Canada and Tepwin was therefore resident in those loca
tions and not in Bermuda at all material times. The evidence
also conclusively established that Murphy Oil Trading Com
pany prior to and up to February 1, 1979, did in fact sell crude
oil to Spur Oil Ltd. under the so-called contract between them;
and this contract document was never formally or informally
abrogated. It was, therefore at all material times a valid and
subsisting contract. The three transactions are artificial within
the meaning of section 137(1). Accordingly, by direct applica
tion of Part I of the Income Tax Act, the finding is that the
excess cost of petroleum products sold, in computing the net
income from the 1970 taxation year of Spur Oil Ltd. is not an
allowable expense.
Snook v. London & West Riding Investments, Ltd. [1967]
1 All E.R. 518, referred to. Minister of National Revenue
v. Leon [1977] 1 F.C. 249, referred to. Minister of Na
tional Revenue v. Cameron [1974] S.C.R.1062, referred
to. Mendels v. The Queen [1978] C.T.C. 404, referred to.
Massey Ferguson Ltd. v. The Queen [1977] 1 F.C. 760,
referred to. Seramco Ltd. Superannuation Fund Trustees
v. Income Tax Commissioner [1976] S.T.C. 100, referred
to. R. v. Alberta and Southern Gas Co. Ltd. [1978] 1 F.C.
454, referred to. Produits LDG Products Inc. v. The
Queen [1976] C.T.C. 591; referred to. Harris v. Minister
of National Revenue [1966] S.C.R. 489, referred to.
Smythe v. Minister of National Revenue [1970] S.C.R.
64, referred to. Salomon v. A. Salomon and Co., Ltd.
[1897] A.C. (H.L.) 22, referred to. Pioneer Laundry &
Dry Cleaners, Ltd. v. Minister of National Revenue
[1940] A.C. (P.C.) 127, referred to. The Commissioners
of Inland Revenue v. His Grace the Duke of Westminster
[1936] A.C. (H.L.) 1, referred to. W. T. Ramsay Ltd. v.
Inland Revenue Commissioners [1979] 1 W.L.R. 974,
referred to. De Beers Consolidated Mines, Ltd. v. Howe
[1906] A.C. (H.L.) 455, referred to. Swedish Central
Railway Co., Ltd. v. Thompson [1925] A.C. (H.L.) 495,
referred to. Egyptian Delta Land and Investment Co., Ltd.
v. Todd [1929] A.C. (H.L.) 1, referred to. Koitaki Para
Rubber Estates Ltd. v. The Federal Commissioner of
Taxation (1940-41) 64 C.L.R. 15, referred to. British
Columbia Electric Railway Co., Ltd. v. The King [1946]
A.C. (P.C.) 527, referred to. H. L. Bolton (Engineering)
Co. Ltd. v. T. J. Graham & Sons Ltd. [1957] 1 Q.B. 159,
referred to. The Lady Gwendolen [1965] 1 Lloyd's Rep.
335, referred to.
INCOME tax appeal.
COUNSEL:
F. R. Matthews, Q.C. and Murray A.
Putnam, Q.C. for plaintiff.
L. P. Chambers, Q.C. and C. Pearson for
defendant.
SOLICITORS:
MacKimmie, Matthews, Calgary, for plain
tiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
GIBSON J.: This is an appeal by Spur Oil Ltd.
(formerly "Murphy Oil Quebec Ltd.") from an
assessment for income tax for its taxation year
1970.
By that assessment, the Minister of National
Revenue (1) disallowed $1,622,728.55 of expenses
claimed by Spur Oil Ltd. (then called Murphy Oil
Quebec Ltd.) as a deduction from its income for
the 1970 taxation year and categorized by the
Minister as the "cost of petroleum products sold";
and (2) as a consequence thereof, increased Spur
Oil Ltd.'s claim for capital cost allowance to
$609,444 and for exploration and development
costs to $88,356 being in each case the maximum
amount of such expenses allowable to Spur Oil
Ltd. for the taxation year 1970; so that (3) Spur
Oil Ltd. was assessed as having a revised taxable
income of $1,528,641.55 in respect of which $622,-
555.96 of income tax was levied and $158,751.76
interest was charged.
The $1,622,728.55 expenses disallowed is
approximately the equivalent of $0.27 U.S. per
barrel of crude oil times the number of barrels of
crude oil allegedly purchased by Spur Oil Ltd. in
the year 1970 from an off-shore Bermuda corpora
tion by the name of Tepwin Company Limited.
The $0.27 U.S. per barrel of crude oil is sometimes
referred to in evidence as "the Tepwin charge" and
represents the difference between $1.9876 U.S. per
barrel being the price stated as being charged (see
Exhibit 1, Document 21.1 dated August 2, 1968)
to Spur Oil Ltd. by Murphy Oil Trading Company
of El Dorado, Arkansas, and $2.25 U.S. per barrel
being the price stated to be charged to Spur Oil
Ltd. by Tepwin Company Limited (Bermuda).
(See Exhibit 1, Document 44 dated February 1,
1970.) The sum constituting this differential is in
the cost of affreightment of the crude oil in 1970
not in the cost of the crude oil itself which
remained stable in 1970.
(The $2.25 U.S. price per barrel, which was the
price in the taxation year 1970, when compared
with the current world price of a barrel of crude oil
points up the delay in final settlement of tax
liability in this case, which is so frequent also in
many other cases.)
(In any event, notwithstanding the result of the
determination of the issues in dispute in this
appeal, the subject assessment for income tax, all
the parties agree, is incorrect in failing to give
credit to Spur Oil Ltd. for the amount represent
ing the extent of the profit element for the crude
oil that arrived on the ship MS Victoria in Decem-
ber 1970. (See Exhibit 1, Document 193.) And
accordingly, this assessment must be referred back
for re-assessment to eliminate the profit element
from this shipload of crude oil (Iranian Zakum) in
computing the income of Spur Oil Ltd. for the
taxation year 1970.)
In respect of the disputed matters of this assess
ment the Minister's position (the defendant) is
that the sum representing the differential between
$1.9876 U.S. per barrel of crude oil and $2.25
U.S. per barrel of crude oil times the number of
barrels purchased in 1970 is not a deductible
expense of Spur Oil Ltd. in its taxation year 1970.
This sum as stated is $1,622,728.55.
The Parties' Positions as
Alleged in the Pleadings
A. The Minister of National Revenue (the defend
ant) alleges that:
1. in December 1969, Murphy Oil Company
Ltd. ("Murphy Calgary"), a Canadian incorpo
rated Company which wholly owned Spur Oil
Ltd. acquired Tepwin Company Limited, a Ber-
muda Company;
2. by agreements dated February 1, 1970,
Tepwin purported to subcharter and purchase
crude oil at a fair market price from another
company by the name of Murphy Oil Trading
Company ("Murphy Trading"), a Delaware
Company associated with Spur Oil Ltd.;
3. by agreement dated February 1, 1970 (see
Exhibit 1, Document 44) Spur Oil Ltd. purport
ed to purchase at a price greater than the fair
market price, its crude oil requirements for the
1970 year from Tepwin;
4. Spur Oil Ltd. had formerly purchased most of
its crude oil requirements at a fair market price
directly from or through Murphy Trading pur
suant to an agreement dated August 2, 1968
(see Exhibit 1, Document 21.1);
5. Tepwin earned a net profit in its 1970 taxa
tion year of $1,556,458.43 and it paid to
Murphy Calgary by way of tax-free dividends
an amount of $1,554,245; and
6. the net profit purported to have been earned
by Tepwin in 1970 was reflected by Spur Oil
Ltd. as an increased cost of crude oil thereby
reducing Spur Oil Ltd.'s income.
B. Spur Oil Ltd. (the plaintiff) alleges that:
1. the net income of Tepwin for its fiscal year
ending December 31, 1970 which apparently has
been utilized by the Minister as a basis for
determining the amount of expenses disallowed
to Spur Oil Ltd. is in fact the profits of Tepwin
during such year which were substantially
attributable to the difference between
(i) Tepwin's actual cost of affreightment
under an agreement made as of February 1,
1970 with Murphy Trading for the transpor
tation of 750,000 tons of crude oil from desig
nated Persian Gulf or Venezuelan ports to a
port designated by Tepwin on the northeast
coast of the United States of America; and
(ii) the substantially higher rates prevailing
on the said February 1, 1970 and at all ma
terial times thereafter at which Tepwin or any
other person, could have arranged affreight-
ment of crude oil in the open market at the
time of actual shipment of crude oil by
Tepwin from such designated ports,
such favourable rates for affreightment of crude
oil made available by Murphy Trading to
Tepwin at no time having been offered to or
otherwise made available to Spur Oil Ltd.;
2. all amounts claimed by Spur Oil Ltd. as the
cost of petroleum products sold in computing its
net income for its 1970 taxation year were
amounts actually and properly incurred in the
said taxation year for such purposes including
its purchases of crude oil from Tepwin made
under the said crude oil purchase agreement
dated February 1, 1970 (see Exhibit 1, Docu
ment 44) at an aggregate cost to Spur Oil Ltd.,
which was not in excess of the aggregate fair
market value at which like quantities and qual
ity of crude oil could have been acquired by
Spur Oil Ltd. on the open market to meet its
requirements for the said processing contract.
Murphy Oil Corporation Organization
Chart and Personnel List
For a better understanding of the facts, it is of
assistance to set out the corporate organization
chart of Murphy Oil Corporation (which is a
public corporation listed on the New York Stock
Exchange with headquarters at El Dorado, Arkan-
sas) and personnel and their titles namely:
MURPHY OIL CORPORATION
CORPORATE ORGANIZATION CHART
1969, 1970, 1971
MURPHY OIL CORPORATION--U.S. Public
(Headquarters, Corporation
El Dorado, Arkansas.)
C.H. MURPHY, JR. Director 6 President
J.A. O'CONNOR, JR. Director 6 Chairman
of the Board
C.E. COWGER,Director 6 Sr. V.P.
PAUL C. BILLER, V.P. Supply 6 Trans
portation
L.R. BEASLEY, Treasurer
J.W. WATKINS, Secretary 6 General Counsel
E.H. HAIRE, Crude 0i1 Representative
R.A. CARNES, Cashier
H.Y. ROWE, Counsel
D.R. CARIG, Controller Department
C.T. SHIPP, Controller Department
K. WINER, Controller Department
100% 1 78% (Balance public owned)
MURPHY OIL TRADING COMPANY-U.S. MURPHY OIL COMPANY LTD. - CANADA
(becomes Murphy Oil Trading P.C. McDonald, Director 6 President
(Eastern) Company H.Q. London, W.R. SEUREN , Director 6 V.P. Marketing
England and Murphy Oil Trading (to March 20, 1969)
(Western) Company H.Q. El Dorado, C.H. MURPHY, JR„ Director
Arkansas about Feb 18,1970) J.G.K. STRATHY, Director
CHARLES E. CONGER, President J.A. O'CONNOR, JR., Director
PAUL C. BILGER, Vice President I B.H. MONZINGO, Director 8 Exec. V.P.
E.H. HAIRE, Vice President T.H. PRANCE, V.P. Prod. 6 Expl.
N. DI TOMASO, V.P. Marketing
(Officers of Murphy 011 Trading P.R. MATTHEWS, Director 6 Secretary
(Eastern) Company) J.A. GOULD, Treasurer 6 Asst-Secretary
I.G.M. IRWIN, Asst. Treasurer
E.T. YOUNG, Mgr.-Prod.& Expl. Acctg.
6 Asst. Secretary
1 100% J 100 î
TEPWIN COMPANY LIMITED - Bermuda 6(RUIRRP ow SPOI L OIL QUEBE C C . )TD. - Canada
B.HAROLD MONZINGO, Director 6
President P.C. MCDONAID, Director 6 President
PAUL C. BILLER, Director 6 V.P. W.R. SEUREN, V.P. Marketing (to
A. GWINNELL, Director 6 V.P. Mar 20, 1969)
J.W. WATKINS,Oirector J . G , K . STRATT{Y, Director
C.T. COLLIS, Director H.B. MONZINGO, Director 6 Exec. V.P.
H.C.. BUTTERFIELD, Director T.H. PRANCE, V.P. Prod. 6 Expl.
.R.S.L. PEARMAN, Alternate Director N. DI TOMASO, Director 6 V.P.
for, Collis 6 Butterfield Marketing
E.H. 13H18!, V.P. P.R. MATTUTEWS,Oirector 6 Secretary
J.A. PECPMAN, Secretary J.A. GOULD, Director 6 Secretary
A.A. RIPLEY, Asst. Secretary I.G.M. IRWIN, Asst. Treasurer
L.R. BEASLEY, Treasurer E.T. YOUNG, Mgr, Prod. 6 Expl. Acctg.
B.D. RICHARDSON, Asst. Treasurer. A.N. MUTT, Mgr. Planning 6 Supply
R.A. CARNES, Bank Signing Authority
2. PERSONNEL LIST (except those of Murphy Oil
Trading (Western) Company, which was not
given in evidence) 1969, 1970, 1971
BEASLEY, L.R. Murphy Oil Corporation,
El Dorado, Ark. USA Tepwin Company Limited
BILGER, P.C. Murphy Oil Corporation,
El Dorado, Ark. USA Tepwin Company Limited,
Murphy Oil Trading Company
BUTTERFIELD, H.C. Tepwin Company Limited
Hamilton, Bermuda
CARNES, R.A. Murphy Oil Corporation,
El Dorado, Ark. USA Tepwin Company Limited
COLLIS, C.T. Tepwin Company Limited
Hamilton, Bermuda
COWGER, C.E. Murphy Oil Corporation,
El Dorado, Ark. USA Murphy Oil Trading Company
CRAIG, D.R. Murphy Oil Corporation
El Dorado, Ark. USA
DI TOMASO, N. Murphy Oil Company Ltd.,
Montreal, Quebec Murphy Oil Quebec Ltd.
FRANCE, T.H. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
GOULD, J.A. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
GRANT, A.W. Murphy Oil Quebec Ltd.
Montreal, Quebec
GWINNELL, A. Tepwin Company Limited
Hamilton, Bermuda
HAIRE, E.H. Murphy Oil Corporation,
El Dorado, Ark. USA Murphy Oil Trading Company,
• Tepwin Company Limited
IRWIN, I.G.M. Murphy Oil Company Ltd.,
Montreal, Quebec Murphy Oil Quebec Ltd.
MATTHEWS, F.R. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
MCDONALD, P.C. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
MONZINGO, H.B. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.,
Tepwin Company Limited
MURPHY, C.H., JR. Murphy Oil Corporation,
El Dorado, Ark. USA Murphy Oil Company Ltd.
O'CONNOR, J.A., JR. Murphy Oil Corporation,
El Dorado, Ark. USA Murphy Oil Company Ltd.
PEARMAN, J.A. Tepwin Company Limited
Hamilton, Bermuda
PEARMAN, R.S.L. Tepwin Company Limited
Hamilton, Bermuda
RICHARDSON, B.D. Tepwin Company Limited
El Dorado, Ark. USA
ROWE, H.Y. Murphy Oil Corporation
El Dorado, Ark. USA
SEUREN, W.R. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
SHIPP, C.T. Murphy Oil Corporation
El Dorado, Ark. USA
STRATHY, J.G.K. Murphy Oil Company Ltd.,
Toronto, Ontario Murphy Oil Quebec Ltd.
WATKINS, .i.w. Murphy Oil Corporation,
El Dorado, Ark. USA Tepwin Company Limited
YOUNG, E.T. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
WIMER, K. Murphy Oil Corporation
El Dorado, Ark. USA
Facts
The plaintiff Spur Oil Ltd. (formerly Murphy
Oil Quebec Ltd.) until February 1970 obtained its
supply of crude oil from Murphy Oil Trading
Company, a Delaware Corporation 100% owned
by the parent Murphy Oil Corporation of El
Dorado, Arkansas.
After February 1, 1970, there was a reorganiza
tion of Murphy Oil Trading Company (the Dela-
ware Corporation) carried out by J. W. Watkins,
Secretary and General Counsel of Murphy Oil
Corporation, El Dorado, Arkansas, as a result of
which (1) Murphy Oil Trading Company became
(a) Murphy Oil Trading (Eastern) Company with
headquarters in London, England, and (b)
Murphy Oil Trading (Western) Company with
headquarters in El Dorado, Arkansas; and (2) at
the same time, Tepwin Company Limited, Ber-
muda was 100% acquired by Murphy Oil Canada
Ltd. the latter of whose headquarters is at Cal-
gary, Alberta. Tepwin Company Limited of Ber-
muda was a so-called "shelf' corporation incorpo
rated during the session of Parliament of Bermuda
in 1969 by Bermuda lawyers, Conyers, Dill and
Pearman. Mr. Watkins, Secretary and General
Counsel of Murphy Oil Corporation, El Dorado,
Arkansas, did all the negotiations and arrange
ments for and bought this Bermuda Corporation
for Murphy Oil Company Ltd. Canada.
Then as said in evidence by him, Mr. Watkins
caused to have put into Tepwin the following
assets: (1) a transportation arrangement, namely,
a contract of affreightment between Murphy Oil
Company Ltd. (the Delaware Corporation) and
Associated Bulk Carriers Limited, Hamilton, Ber-
muda (see Exhibit 1, Book 1, Document 12 dated
March 28, 1968) which contract of affreightment
had a 2 1 / 2 -year term to run, by causing to have
entered into and executed what Mr. Watkins
called a "subcharter of affreightment" between
Tepwin and Spur Oil Ltd. (see Exhibit 1, Book 1,
Document 42). Mr. Watkins stated that he did this
because he did not want to ask Associated Bulk
Carriers Limited to assign the existing contract of
affreightment to Tepwin; (2) by causing a crude
oil sales agreement to be entered into and executed
as of February 1, 1970 between Murphy Oil Trad
ing Company and Tepwin Company Limited (see
Exhibit 1, Book 1, Document 43); and (3) by
causing to be entered into and executed a contract
dated February 1, 1970 between Tepwin Company
Limited and Spur Oil Ltd. for the delivery of
crude oil. (See Exhibit 1, Book 1, Document 44.)
The effect of these three contracts was that from
and after February 1, 1970, Spur Oil Ltd. paid for
crude oil $2.25 U.S. per barrel instead of $1.9876
U.S. per barrel which Spur Oil Ltd. had heretofore
paid. Spur Oil Ltd. had heretofore paid $1.9876
U.S. per barrel price by reason of the document
dated August 2, 1968 (Exhibit 1, Book II, Docu
ment 21.1).
As to this latter Exhibit 1, Document 21.1, Mr.
Watkins' evidence was that when he caused said
contracts, Exhibit 1, Documents 42, 43 and 44 to
be entered into and executed between Tepwin and
Spur Oil Ltd., he did not know of the existence of
Document 21.1. And the position of Spur Oil Ltd.
in this action is that Document 21.1 is not a
contract and should be ignored.
Under Exhibit 1, Document 21.1, Murphy Oil
Trading Company (the Delaware Corporation) did
in fact sell crude oil to Spur Oil Ltd. at $1.9876
U.S. per barrel until February 1, 1970.
As to Exhibit 1, Document 21.1 also Mr. Mon-
zingo, a Director and Executive Vice-President of
Spur Oil Ltd. (and Director and Vice-President of
Spur Oil Ltd.'s parent company, Murphy Oil
Company Ltd., Canada, and Director and Presi
dent of Tepwin Company Limited, Bermuda, the
other subsidiary 100% owned by the said Canadian
parent company) said in evidence that it was not a
contract in that there was no obligation on Spur
Oil Ltd. to do anything under that document; that
in any event, Exhibit 1, Document 21.1 was in
essence a memorandum of an inter-company trans
action which established at the date of that docu
ment a fair market value for crude oil delivered
from the Persian Gulf to the pipeline at Portland,
Maine for ongoing shipment by pipeline from
Portland, Maine to Montreal, Quebec; and that
when the arrangement and delivery of crude oil
under that document, Exhibit 1, Book 1, Docu
ment 21.1, which had existed from August 2,
1968, was substituted for the arrangement or con
tract for delivery of crude oil, Exhibit 1, Book 1,
Document 44 dated February 1, 1970 between
Spur Oil Ltd. and Tepwin, he (Mr. Monzingo)
determined the price at February 1, 1970 in that
contract at $2.25 U.S. per barrel as being a fair
market price, having regard in the main to the
then cost of affreightment.
During all the relevant periods the cost of crude
oil remained relatively stable and so there is no
allegation that there was any upward change in
the price of crude oil that justified the changes
purported to be effected by the execution of Docu
ments 42, 43 and 44. It was the price of the freight
element in essence that had changed. And such
change in the freight element, it is alleged, justi
fied the upward change in the Spur Oil Ltd. cost
to $2.25 U.S. per barrel, the amount of which
change was the sum representing the said differen
tial, approximately $0.27 U.S. per barrel of crude
oil.
Mr. Watkins said that he undertook this reor
ganization of Murphy Oil Trading Company (the
Delaware Corporation) (which as stated, was done
by dividing it into Murphy Oil Trading (Eastern)
Company and Murphy Oil Trading (Western)
Company and by acquiring Tepwin Company
Limited, Bermuda) after he had ascertained cer
tain tax advantages in acquiring and utilizing an
off-shore company, after receiving advice from a
legal friend in New York.
Regarding how Tepwin Company Limited the
Bermuda Company would operate and be
managed, Mr. Monzingo in his discovery at page
437 was asked this question and gave this answer,
which was put in evidence at this trial:
Q. MR. PEARSON: Referring you to the second page of
Exhibit 37, in the paragraph in respect of Tepwin Com
pany Ltd., was it contemplated at that time that the
office at Hamilton, Bermuda, would be used by Tepwin
for the administration of its affairs and the conduct of its
operations?
A. I think the conduct anticipated at that time, the conduct
of its operations would be carried on for El Dorado,
Arkansas. It would be headquartered—at that point, it
would be headquartered and have more or less an office
for carrying out the administrative matters necessary to
comply with the legal requirements to end up in
Bermuda.
As it turned out and as detailed in the evidence
at this trial, all acts of control and management of
the operations and decisions made in respect to
and arrangements for all transactions entered into
by Tepwin were done and made at El Dorado,
Arkansas, Calgary, Alberta and Montreal,
Quebec. Substantially, all of such acts of control
and management that were done and made at El
Dorado were done and made by two key figures,
Mr. Paul Bilger, Vice-President, Supply and
Transportation, Murphy Oil Corporation, El
Dorado, Director and Vice-President, Tepwin
Company Limited, Bermuda and Vice-President,
Murphy Oil Trading (Eastern) Company, London,
England and Vice-President Murphy Oil Trading
(Western) Company, El Dorado, Arkansas, and by
Mr. J. W. Watkins, Secretary and General Coun
sel, Murphy Oil Corporation, El Dorado, Arkansas
and Director, Tepwin Company Limited.
Mr. Bilger was in charge of acquiring all crude
oil supplies and arrangements for transportation of
it for all the companies in the Murphy Oil corpo
ration organization; and Mr. Watkins was in
charge of the legal matters for all the companies in
the Murphy Oil corporate organization.
As to Tepwin Company Limited, specifically the
solicitors and the Bermuda directors and officers
of it in Bermuda acted as mere scribes for Mr.
Watkins doing only what he instructed them to do.
They exercised no control and management and
made no decisions as to transactions.
Specifically, in reference to Tepwin as to the
transaction for the procurement of crude oil supply
and the transportation of it, they did nothing and
did not even receive any instruction about these
matters: Mr. Bilger looked after these matters. As
to the financial matters of Murphy Oil Company
Ltd. (which owned 100% of Spur Oil Ltd.) in
Canada vis-Ã -vis Tepwin, Mr. J. A. Gould of
Spur Oil Ltd. managed such. As to the overall
management of financial matters, such was direct
ed by the directors and officers of Murphy Oil
Company Ltd. in El Dorado, Arkansas, (see
Exhibit 1, Book III, Document 188, the money
chart, as to how the funds were transferred be-
tween and among all the Murphy Corporations in
the Murphy corporation organization). And as to
other matters concerning Tepwin in Canada, the
control at Calgary was that of Mr. Monzingo and
of Mr. Gould, and at Montreal the control was
that of Mr. Monzingo in the main and of some
other persons under him.
In sum therefore, although Tepwin Company
Limited, after February 1, 1970, was alleged to be
in the business of purchasing, selling and deliver
ing oil, none of its officers and directors in Ber-
muda exercised any control over any such aspects
of that business. Tepwin was supposed to purchase
oil in the Middle East and have it transported to
Portland, Maine. But in fact, Murphy Oil Trading
Company (later Murphy Oil Trading (Western)
Company) headquartered in El Dorado, Arkansas,
after February 1, 1970, purchased the oil in the
Middle East and delivered it to Portland, Maine
for ongoing shipment by pipeline to Montreal and
Tepwin did not.
Some evidentiary proof of this, and there are
many other examples, are (1) the fact that in 1970
all invoices to Tepwin were from Murphy Oil
Trading (Western) Company; and all bills of
lading, evidence of title and negotiable, were made
out to Murphy Oil Trading (Western) Company
and not Tepwin; (2) the fact that regarding the
so-called Tepwin charge (that is the differential
between $2.25 and $1.9876) Spur Oil Ltd. always
considered that it was not paying the sum repre
senting this differential in the price it paid for
delivered crude oil, but instead was paying $1.987.
(See Exhibit 1, Book II, Document 158, which are
bookkeeping entries where there is a notation that
the parent company instructs to add $.272 and
Spur Oil Ltd.'s accountants note in effect they will
"bury it" "before going to bed"); (3) the fact that
Tepwin did not incur the normal expenses that one
would expect if Tepwin did actually control and
manage an international business trading in crude
oil. Instead, Tepwin only had charges and expenses
for leasing a pro forma office in Bermuda. (See
Exhibit 1, Book II, Document 141 being the finan
cial statements for Tepwin Company Limited for
the year ended December 31, 1970); (4) the fact
that Mr. Watkins informed the solicitors in Ber-
muda, Conyers, Dill and Pearman to write up
Directors' Minutes declaring a dividend each time
a shipload of oil left the Persian Gulf for delivery
at Portland, Maine, the dividend being approxi
mately equal to the so-called $0.27 Tepwin charge
times the number of gallons of crude oil in each
shipload; (5) the fact that in Exhibit 1, Document
141 the firm of Peat, Marwick, chartered account
ants of Bermuda recorded the true expenses of
Tepwin; (6) the fact that in Document 17 in
Separate Book dated August 31, 1973 the words
reading "pertaining to the audit of Tepwin ...",
established that no audit was done for Tepwin
until after August 1973; (7) the fact that all the
operations transactions and functions taken and
done relating to the purchase and sale of crude oil
in 1970 were managed and controlled at El
Dorado; as to this, every telex sent to and from
Esso, British Petroleum etc., was sent to and by
Murphy Oil Trading Company, El Dorado,
Arkansas; and (8) the fact that the total sum
representing the total so-called Tepwin charge, the
differential of $0.27 times the number of gallons of
crude oil, except for a small amount for expenses,
was passed to the Canadian parent company of
Spur Oil Ltd., in Calgary by way of tax-free
dividends. (See the records of declaration of divi
dends on a shipload by shipload basis, Exhibit 1,
Document 142, Directors' meeting and Documents
59, 67, 80, 90, 94, 97, 113 and 119, all of which
were mentioned by Mr. Monzingo in his evidence.)
Expert evidence was called by the defendant as
to whether or not what was contemplated in
respect of operations and transactions by Tepwin
Company Limited and Spur Oil Ltd., as set out in
the contracts, Exhibit 1, Book 1, Documents 42, 43
and 44 was normal and what might be expected in
the business world. One of such expert witnesses
was Otto G. Glander. He is Chairman of Glander
International Inc. of New York, N.Y. Ship
Brokers. He has had substantial experience in
international shipping and in the business of
tanker and bunker brokers and agents, especially
the business of brokering sea-going vessels and oil
cargoes and generally in other related businesses.
Mr. Glander gave evidence in respect of the fol
lowing four questions posed to him by counsel for
the defendant:
1. Whether the freight rates for the transportation of crude oil
which were agreed by Associated Bulk Carriers Ltd. (as owner)
and Murphy Oil Trading Company (as charterer) in their
contract of March 28, 1968, (Exhibit 1, Book 1, Document 12)
constituted 'fair market value'.
2. Whether the contract of February 1, 1970, (Exhibit 1, Book
1, Document 42) entered into between Murphy Oil Trading
Company and Tepwin Company Limited was a contract which
was typical of contracts of affreightment normally entered into
in the course of the tanker chartering trade.
3. Whether the freight rates charged by Murphy Oil Trading
Company to Tepwin Company Limited in the said contract of
February 1, 1970, (Exhibit 1, Book 1, Document 44) constitut
ed 'fair market value'.
4. Whether the freight element in the price of crude oil
delivered C.I.F. Portland, Maine, charged to the Plaintiff by
Tepwin Company Limited under their agreement of February
1, 1970, (Exhibit 1, Book 1, Document 43) constituted 'fair
market value'.
Mr. Glander deposed in part as follows:
In order to answer these questions counsel of the Depart
ment of Justice made available to me the pleadings in this
action, the documents produced by both parties and the
transcript of the examination for discovery of Mr. B.H.
Monzingo on behalf of Spur Oil Ltd. I have read these
materials, and have as well, consulted market records of
Glander International Inc. and other information available in
the trade.
In addition, Mr. Glander was present at this
trial and heard all the evidence adduced by Spur
Oil Ltd.
Hereunder is set out in some detail some of the
verbatim evidence of Mr. Glander for a number of
reasons, all of which are for the purpose of better
understanding the issues in this appeal. For such
purpose the evidence regarding the various types of
contracts normally entered into in international
trade for the transportation of crude oil, in the oil
tanker market, in spot charter market, and the
evidence regarding the spot market prices paid for
crude oil, are especially helpful:
1. Did the freight rates for the transportation of crude oil which
were agreed by Associated Bulk Carriers Ltd. (as owner) and
Murphy Oil Trading Company (as charterer) in their con
tract of March 23, 1968, constitute 'fair market value'?
The contract of March 23, 1968 between Associated Bulk
Carriers Ltd. as "Owner" and Murphy Oil Trading Com
pany as "Charterer" ...(Exhibit 1, Book 1, Document 12) is
a contract which in the shipping trade is known as a "Con-
tract of Affreightment". In the oil shipping business a con
tract of affreightment is an agreement whereby an owner of
tankers or other bulk carriers agrees to make available, on a
voyage charter basis, as distinguished from a time or bare
boat basis, a certain vessel within a restricted physical condi
tion, such as length, beam, draft, etc., at certain time inter
vals from designated loading ports to designated discharge
ports, at a stated price per ton. Such price or rate is at the
present time usually expressed as units above or below 100,
or "Worldscale 100", while shipping contracts negotiated up
to September 15, 1969, had their rates expressed as percent
ages above or below a scale of rates which was known as
"Intascale". Thus the contract of affreightment between
Associated Bulk Carriers Ltd. and Murphy Oil Trading
Company ... expresses the transportation fee at "Intascale
less 62 1 / 2 %."
"Intascale" was a rate reference published by The Interna
tional Tanker Freight Scale Association Limited, of London,
England, up to September 15, 1969, while "Worldscale" has,
since that date, been a rate reference published jointly by the
International Tanker Nominal Freight Scale Association
Limited and the Association of Ship Brokers and Agents
(Worldscale), Inc. of New York, N.Y.
Both the Intascale and Worldscale rates are predicated on
the daily operating costs of a 19,000 ton diesel tanker,
making a round-trip voyage between designated loading and
discharge ports, plus the costs of bunker fuel consumed for
the round voyage, plus port charges incurred, such as agency
fees, tugs, customs, overtime dues, etc. The basic assumption
is that the vessel is paid to return to the original loading port
in ballast, and that the total cost of the round voyage is
divided by the total tons of cargo carried, expressed in long
tons, resulting in a U.S. dollar figure which is published as
the rate for that particular voyage. It was expressed in terms
of "Intascale" for contracts negotiated up to September 15,
1969, and has been expressed in terms of "Worldscale" for
contracts negotiated after that date. These rates thus relate
the average costs of operating a vessel between two given
ports. The "Intascale" rates were published annually; so were
the "Worldscale" rates until two years ago, when fluctuating
port charges and unpublished rates compelled semiannual
revisions to these rates. The basic formula, however,
remained unchanged until 1979, when wildly fluctuating
bunker prices dictated a complete revision of the formula
every six months commencing 1980.
The difference between "Intascale" and "Worldscale"
rates lies basically in the difference between the daily operat
ing costs of a vessel quoted in £ Sterling and US $1,800 a
day and also in the computation of the lay-time of a vessel.
The reason for the abandonment of "Intascale" and the
adoption of "Worldscale" was the desire to merge the "Inta-
scale" rate structure with the American Tanker Rate
Schedule (known as "A.T.R.S.") and to have one world-wide
acceptable rate structure.
The London Tanker Brokers' Panel under contract to the
Shell and BP oil companies, also publishes, on a monthly
basis, "Average Freight Rate Assessments" ("AFRA").
These rates expressed in U.S. dollars, are calculations made
over a monthly period running from the 16th of one month to
the 15th of the following month and represent the weighted
average cost of commercially chartered tonnage as employed
in the international transport of oil during the calculation
period, and such tonnage is divided into four categories, i.e.
owned vessels, long-term chartered vessels, short-term char
tered vessels and single-voyage charters (spot market). It is
important to bear in mind that the period charters upon
which the AFRA rates are based are those in existence in
that monthly period, regardless to when they were negotiated
or entered into. AFRA rates thus cannot be taken as a
reflection of the current tanker market. AFRA rates are at
best approximations to the cost of long-term chartered and
owned tonnage.
There are many types of contracts for the transportation of
oil that are entered into in the oil tanker market. These can
generally be broken down into long-term, short-term and
spot charters. A long-term charter is usually one in which the
owner strives to pay off the cost of the vessel over a period of
time, which, depending on market conditions, may vary from
eight to twelve years. Thus a long-term charter will ordinar
ily be of such duration, but may be any period over three
years. A short-term charter, on the other hand, is one which
generally does not exceed three years. Such charters are
usually entered into as a result of short-term needs of
charters which owners are prepared to meet as a result of
their own needs. While long-term charter rates may as a
general rule be expected to be lower than short-term charter
rates, it is not uncommon that short-term charter rates may
as a result of depressed market conditions be lower than
long-term charter rates.
The third principal category of oil tanker charters is spot
charters. This is a type of charter which is entered into as a
result of immediate needs occasioned by such things as cargo
sales, breakdown of chartered vessels, peak requirements in
winter and many other factors. Such charters are usually
entered into on a voyage-by-voyage basis, although some of
them may be for as many as three voyages. Spot charter
rates may therefore be expected to be, and indeed are, the
most volatile of all tanker charter rates in that they reflect
most closely any current prevailing changes in short-term
market conditions.
In 1970, when the Plaintiff allegedly purchased oil from
Tepwin Company Limited, the long-term oil charter rates for
voyages between the Persian Gulf and U.S. East Coast ports
for vessels of cargo capacity of between 35,000 and 65,000
tons equated between "Worldscale 83" and "Worldscale 80".
At that time the short-term range for similar tonnages for
similar voyages equated between "Worldscale 74" and
"Worldscale 127" averaging "Worldscale 88", while the
market for the spot market fluctuated between "Worldscale
120" and "Worldscale 290". AFRA rates in 1970 for "medi-
urn" size cargoes ranged from "Worldscale 102" to "World-
scale 156.8", while that for "Large 1" size cargoes was
"Worldscale 75.3" to "Worldscale 109.7".
In March, 1968, i.e. the time that the contract of affreight-
ment between Associated Bulk Carriers Ltd. and Murphy
Oil Trading Company was entered into, the going long-term
oil tanker charter rate for Persian Gulf—U.S. East Coast
ports voyages equated to "Intascale minus 23%", while the
rates for short-term and spot charters equated to "Intascale
minus 15%" and "Intascale minus 26%" respectively. At that
time AFRA for "medium" size cargoes was "Intascale minus
23.7%", and for "Large 1" size cargoes was "Intascale minus
34.5%".
As I have said, the contract between Associated Bulk
Carriers Ltd. and Murphy Oil Trading Company was a
contract of affreightment. The rates negotiated for such
contracts, unlike the rates negotiated for time charters or
consecutive voyage charters, are not designed to reflect the
entire cost of the round-trip voyage of the vessel, but are
rather negotiated on the assumption that the cost of the
return voyage or of a portion of it, will be borne or defrayed
by revenue derived from the transportation of other cargo. It
may therefore be expected that rates negotiated for contracts
of affreightment will be lower than rates negotiated for time
charters or consecutive voyage charters, and a comparison of
the rate agreed to in the contract between Associated Bulk
Carriers Ltd. and Murphy Oil Trading Company with the
going rates for time charters and consecutive voyage charters
in effect in 1968 bears this out.
While the rate in the Associated Bulk Carriers Ltd.—
Murphy Oil Trading Company contract at "Intascale minus
62 1 / 2 %" appears to be low when compared to their prevalent
rates for time charters or consecutive voyage charters for
voyages between the Persian Gulf and U.S. East Coast ports,
it was agreed to by independent parties and thus presumably
met their respective needs in March, 1968. It is therefore, in
my opinion, a "fair market rate" or "fair market value" for
the transportation of oil under the special conditions agreed
to by the parties at that time for the 2' year period
specified.
. Was the contract of February 1, 1970 (Exhibit 1, Book 1,
Document 42) entered into between Murphy Oil Trading
Company and Tepwin Company Limited a contract which
was typical of contracts of affreightment normally entered
into in the course of the tanker chartering trade?
This contract purports to be a subcontract of affreight-
ment whereby Murphy Oil Trading Company endeavours to
charter to Tepwin Company Limited ships under charter to
Murphy Oil Trading Company from Associated Bulk Carri
ers Ltd. by virtue of the contract of affreightment of March
23, 1968.
'There are, however, unusual features to this contract. In
the ship chartering business the parties to a contract of
affreightment are referred to as "owner" and "charterer",
respectively, and the parties to a subcontract of affreight-
ment are referred to as "chartered owner" or "disponent
owner" and "charterer", respectively. The description of the
parties employed in this contract of February 1, 1970, is not
customary in the trade. The only conclusion I can come to as
a person experienced in the business is that this contract was
drawn by a person not familiar with the language in the
trade. In fact, it appears from the transcript of Mr. Monzin-
go's examination for discovery (pp. 293-294 ...) that this
contract was drawn "in house", i.e. by an employee of the
Murphy group of corporations.
Clause 1 of the contract provides that liftings are to be
made commencing February 1, 1970, and also that "the first
lifting shall not be made prior to February 1, 1970". Obvi
ously, since the contract is to take effect on February 1,
1970, the reference to any liftings prior to that date is
redundant. Also, it is patently impossible for no liftings to be
made in the past, i.e. before February 1, 1970, and I have
never seen any such clause in any contract entered into in the
normal course of business.
Furthermore, one of the provisions of Clause 1 of the
contract is physically most awkward to implement. Unless
one assumes that the first lifting is to be made right on
February 1, 1970, the date of the contract, and the last on
December 31, 1970, the reference to a minimum of 12
liftings in thirty-day periods assumes an air of improbability.
The reference to a maximum of 20 liftings in thirty-day
periods certainly looks like a mathematical impossibility.
Also it is difficult to understand why such awkward and
unworkable lifting provisions were substituted for the
straight-forward lifting provisions under the prime contract
between Associated Bulk Carriers Ltd. and Murphy Oil
Trading Company.
Finally, the freight is, in clause 6 of this contract,
expressed as "Worldscale 46.6" on Persian Gulf loadings.
While it is usual in the trade to express "Worldscale" rates
in fractions of .25, .5, or .75, it is unusual to express them in
other fractions, such as .6, as is done in this contract. It
therefore seems to me that this "Worldscale 46.6" rate is
merely a conversion factor, probably of "Intascale minus
62 1 / 2 %" (the rate quoted in the Associated Bulk Carriers
Ltd.—Murphy Oil Trading Company contract of affreight-
ment).
The foregoing are all features which are unusual in a
contract of affreightment which are entered into by parties
dealing at arm's length in the ordinary course of business.
They are of a nature which leads me to believe that whatever
may have been the reasons for drafting this contract between
Murphy Oil Trading Company and Tepwin Company Lim
ited, commercial considerations could not have been para
mount, so that in my opinion, this contract is not one which
is typical of contracts of affreightment normally entered into
in the course of the tanker chartering trade.
3. Were the freight 'rates charged by Murphy Oil Trading
Company to Tepwin Company Limited in the contract of
February 1, 1970, (Exhibit 1, Book 1, Document 44) "fair
market value"?
Had Murphy Oil Trading Company or Tepwin Company
Limited, on or about February 1, 1970, gone into the market
to obtain a contract fo the transportation of oil of 11 or 12
months' duration, for the quantities specified in the contract
of February 1, 1970, they would have sought a short-term
charter, a consecutive voyage charter or a contract of
affreightment. Of these three types of contract, a contract of
affreightment is usually the cheapest. On or around Febru-
ary 1, 1970, the going market rates for voyages from the
Persian Gulf to U.S. East Coast ports for the duration in
question were equivalent to about "Worldscale 88" for short-
term charters, (although it should be borne in mind that both
time charters and consecutive voyage charters are usually
negotiated on a world-wide trading basis, rather than merely
for more restricted voyages, such as between the Persian
Gulf and U.S. East Coast ports).
Around February 1, 1970, the spot market was about
"Worldscale 100" for one voyage between the Persian Gulf
and U.S. East Coast ports. A prudent purchaser of oil
transportation would go into the spot market only to supple
ment a basic transportation contract; he would not consider
the spot market as a basis for oil transportation for anything
but the shortest of periods. The spot market rates around
February 1, 1970, in my view, therefore, are inappropriate
when considering a transportation contract, such as that
between Murphy Oil Trading Company and Tepwin Com
pany Limited. Rather, a company with the needs of Murphy
Oil Trading Company, i.e. to perform a contract, such as
that between it and the Tepwin Company Limited, would
have been interested in a time charter of an at least eleven-
month duration or a consecutive voyage charter or a contract
of affreightment. Since both Murphy Oil Trading Company
and Tepwin Company Limited by their contract indicated
that a contract of affreightment met their needs, the most
relevant market rates to consider would therefore appear to
be rates of similar contracts of affreightment to take effect
around February 1, 1970. Had such a contract been entered
into in the market at that time, the rate would, in my
opinion, have been about "Worldscale 78", and this rate
would most accurately reflect "fair market value" in the
circumstances.
The rate of "Worldscale 46.6" charged to Tepwin Com
pany Limited by Murphy Oil Trading Company cannot
therefore be said to be comparable to market rates, but was
rather below them. Bearing in mind that this was a transac
tion which neither was negotiated nor came into existence as
a result of normal market forces, and that it is one of the
basic purposes of any business transaction to charge what the
market will bear, so as to maximize profits, the fixing of this
rate could not have been motivated by commercial consider
ations. Since it cannot, therefore, be said to have had any
relation to the market, it cannot, in my opinion, be said to
have "constituted 'fair market value' ".
4. Did the freight element in the price of crude oil delivered
C.I.F. Portland, Maine, charged to the Plaintiff by Tepwin
Company Limited under their agreement of February 1,
1970 (Exhibit 1, Book 1, Document 43), constitute "fair
market value"?
Although the contract between the Plaintiff and Murphy
Oil Trading Company of August 2, 1968, for the sale of oil
delivered at Portland, Maine at US $1.9876 per barrel does
not break down the price into its crude oil and transportation
elements, it may safely be assumed that the crude oil element
was no more than US $1.39 per barrel. This is supported by
the contract between BP Canada and the Plaintiff of April 1,
1966, as amended on October 23, 1968, and Mr. Monzingo's
testimony in his examination for discovery, at pp. 301-305
... By simple subtraction the transportation element of the
total price therefore amounted to about US $0.60 per barrel.
"Intascale minus 62 1 / 2 %", as per the contract of affreight-
ment of March 28, 1968, between Associated Bulk Carriers
Ltd. and Murphy Oil Trading Company, was about US
$0.58. The difference between US $0.60 and US $0.58 per
barrel may possibly lie in marginal mathematical errors in
the calculation of those figures.
It may also be safely assumed that the price of the type of
crude oil involved in this case F.O.B. Persian Gulf (Kharg
Island) was no more than US $1.39 per barrel in February,
1970 (see the crude oil sale agreement of February 1, 1970
between Murphy Oil Trading Company and Tepwin Com
pany Limited, and Mr. Monzingo's testimony at pp. 301-305
of the transcript of the Plaintiff's examination for discovery,
... Therefore, when US $1.39 is subtracted from US $2.25
(the purported sale price in the agreement of February 1,
1970, between the Plaintiff and Tepwin Company Limited),
the transportation element amounts to US $0.86 per barrel,
or an increment of between US $0.26 and US $0.28 per
barrel over the transportation element of the price in the
Plaintiff—Murphy Oil Trading Company contract of August
2, 1968.
US $0.86 per barrel as of February 1, 1970 is about
"Worldscale 69". At that time all the going market rates for
the transportation of oil between the Persian Gulf and U.S.
East Coast ports were higher ... The price purportedly
charged by Tepwin Company Limited to the Plaintiff by the
agreement of February 1, 1970, was therefore, at least to the
extent of its transportation element, below the "fair market
value" prevailing at the time.
A purchaser of oil in the position of the Plaintiff before
February 1, 1970, i.e. having a contract for the supply of oil
by Murphy Oil Trading Company at US $1.9876 per barrel,
for a period of time which was not to expire until April 30,
1973, would naturally seek to improve its position by seeking
to lower its costs, or otherwise. The substitute of the contract
of February 1, 1970, for that of August 2, 1968, however,
increases the Plaintiff's costs. Such a substitution would
make commercial sense only if the Plaintiff were somehow to
gain other benefits. Such benefits could not have laid in any
additional transportation services to be performed by Tepwin
Company, for the Plaintiff continued to buy the oil delivered
at Portland, Maine with no responsibility by it for the
transportation of the oil.
Mr. Monzingo has stated in his examination for discovery
(see pp. 235-240 ...) that the Plaintiff had by December,
1969, become concerned about both the supply of the oil
which it purchased from Murphy Oil Trading Company and
about its transportation. Mr. Monzingo has stated that the
sale contract of August 2, 1968, between the Plaintiff and
Murphy Oil Trading Company was only a "best efforts
contract", under which shortages had developed apparently
occasioned by interruptions in the availability of crude oil
supply and slippages in its transportation, and that the new
contract with Tepwin Company Limited was substituted for
that with Murphy Oil Trading Company in order to alleviate
these difficulties.
However, I fail to see how, in any commercial sense, this
objective could possibly have been achieved by such substitu
tion. For Tepwin Company Limited did not have any greater
control over the supply of oil than Murphy Oil Trading
Company from which it purchased its oil (see the sale
agreement of February 1, 1970, between Tepwin Company
Limited and Murphy Oil Trading Company). So far as the
alleged transportation problem is concerned, Tepwin Com
pany Limited could not have alleviated it, in that it purported
to obtain its transportation by way of its subcontract of
affreightment with Murphy Oil Trading Company. It may
well be that Tepwin Company Limited may have had to
charter transportation at higher rates, in addition to that of
its subcontract of affreightment; but this cannot, in my
opinion, be viewed as an improvement over the situation
prevailing up to that time, because Murphy Oil Trading
Company could have chartered such additional transporta
tion itself, and it did in fact do so twice in 1969 (see Mr.
Monzingo's testimony on his examination for discovery at pp.
252-253, ...) In any event, Tepwin Company Limited did
not pay out this US $0.26 to US $0.28 per barrel transporta
tion increment to anyone for additional transportation
efforts, but rather retained it as its profits which it then
remitted to its parent company Murphy Oil Company, Ltd.,
of Calgary, Alberta, as a dividend.
... (Spur Oil Ltd.) also alleges (see paragraph 12 of the
Statement of Claim) that "Tepwin performed a bona fide
and economic business function for and on behalf of both ...
(Spur Oil Ltd.) U.S. Parent Corporation and its Canadian
Parent Corporation in acting as an insulator of the business
operations and assets of the Plaintiff from the risk of poten
tial liability as an owner of tanker cargoes of crude oil which
could arise in the event of spillage of such crude oil on the
high seas or in coastal waters while facilitating the utilization
by the U.S. Parent Corporation of its proprietary crude
produced in Venezuela and the Persian Gulf area".
... (Spur Oil Ltd.) had purchased its oil from Murphy Oil
Trading Company at Portland, Maine up to February 1,
1970. This meant that ... (Spur Oil Ltd.) was not exposed to
any risks in the transportation of oil before its delivery at
that port. The practice to purchase the oil at Portland, Maine
continued after February 1, 1970, the only difference being
the purported substitution of Tepwin Company Limited for
Murphy Oil Trading Company. I therefore find it difficult to
understand how the substitution could have afforded ...
(Spur Oil Ltd.) any insulation from high-seas transportation
risks in addition to that under its contract with Murphy Oil
Trading Company. On the other hand if one were to assume
from the allegations in paragraph 12 of the Statement of
Claim that from February 1, 1970 onward ... (Spur Oil
Ltd.) would have had to look after its own transportation of
oil to Portland, Maine had it not been for the interposition of
Tepwin Company Limited, such interposition could not, in
my opinion, have saved ... (Spur Oil Ltd.) from being
exposed to the risk of potential liability. For Tepwin Com
pany Limited being a company without an established com
mercial reputation for reliability and credit, would not likely
have been able to enter into any oil transportation contracts
without ... (Spur Oil Ltd.) guaranty of performance.
Furthermore, assuming that what is meant by "facilitating
the utilization by the U.S. Parent Corporation of its proprie
tary crude oil produced in Venezuela and the Persian Gulf
area" is arranging for its transportation, then Tepwin Com
pany Limited certainly had no greater capability in this
regard than Murphy Oil Trading Company. In fact, all the
expertise in this regard lay with Murphy Oil Trading Com
pany, and not with Tepwin Company Limited, a newcomer to
the field. On the other hand, if what is meant by that phrase
is that Tepwin Company Limited facilitated the U.S. Parent
Corporation's ability to sell its crude oil, I find it difficult to
see how ... (Spur Oil Ltd.)—Tepwin Company Limited
contract was an improvement in this regard over ... (Spur
Oil Ltd.)—Murphy Oil Trading Company contract.
I have also reviewed the documentation produced by the
parties and the transcript of Mr. Monzingo's examination for
discovery in a search for a commercially justifiable basis on
which the increment in the transportation element of the
price was calculated, but have been unable to discover one.
In other words, the amount of this increment appears to have
been arrived at arbitrarily with no reference to market
factors.
It is therefore my opinion that the substitution of the
contract with Tepwin Company Limited for that with
Murphy Oil Trading Company was not undertaken for any
valid commercial reasons. Similarly, since the transportation
element of the price ostensibly agreed to between ... (Spur
Oil Ltd.) and Tepwin Company Limited neither reflected the
going market rate for such transportation in February, 1970,
nor was arrived at for any valid commercial reasons it
cannot, in my opinion, be taken to have "constituted 'fair
market value' ".
Taking into consideration this and the other
expert evidence and the evidence of Spur Oil Ltd.,
as to the status of the document, Exhibit 1, Book
1, Document 21.1, it would appear that on August
2, 1968 Spur Oil Ltd. entered into a crude oil sales
agreement and crude oil processing agreement
with British Petroleum at Montreal (see Exhibit 1,
Book 1, Documents 1, 2 and 3). After that, the
persons at El Dorado, Arkansas, having control
and management of all the Murphy enterprises
wanted to expand operations in Quebec, Canada,
to develop what is referred to in the evidence as
the Sasson Proprietary crude. For that purpose
Spur Oil Ltd. obtained an option from British
Petroleum to bring in its own proprietary crude for
refining by British Petroleum at the latter's refin-
ery at Montreal, Quebec, Canada. In preparation
for that Murphy Oil Trading Company (U.S.)
entered into the contract of affreightment in 1968
above referred to, namely Exhibit 1, Book 1,
Document 12. It appears that the intention under
this contract was that Murphy Oil Trading Com
pany (U.S.) would supply Spur Oil Ltd. with
sufficient proprietary crude to fulfill the Spur Oil
Ltd.'s obligation with British Petroleum, that is by
the shipment of such proprietary crude from the
Middle East to Portland, Maine and then by tran-
shipment by pipeline to Montreal, Quebec for
Spur Oil Ltd.'s account.
It would appear that Murphy Oil Trading Com
pany entered into this contract (Exhibit 1, Book 1,
Document 12) because it had agreed to supply
Spur Oil Ltd. with its crude requirements at a
price of $1.9876 U.S. per barrel to enable Spur Oil
Ltd. to carry out its intent by the contract with
British Petroleum to put proprietary crude oil
through British Petroleum's refinery. Mr. Monzin-
go's evidence in effect confirms this. Otherwise,
Spur Oil Ltd. would be put out of business or
would have to buy crude from British Petroleum,
either of which alternative would be economically
objectionable. (See Exhibit 1, Book 1, Document
15.)
It appears further from the evidence that in
1969 Murphy Oil Company Ltd. in order to fulfill
such obligation with British Petroleum chartered
the ships Phantam and Orient Clipper at spot
charter rates and did not pass on this excess cost of
doing so to Spur Oil Ltd. Mr. Monzingo confirms
this. (See page 257 of his discovery, which was
made part of the evidence.) What Mr. Monzingo
said was that this excess cost could not be passed
on because of the agreement with Spur Oil Ltd.,
(that is, agreement of August 2, 1968, Exhibit 1,
Book 1, Document 21.1).
As further corroboration that the parties acted
upon Exhibit 1, Book 1, Document 21.1 on the
basis that it was a contract, such document should
be compared with Exhibit 1, Book 1, Document
22, the agreement with Spur Oil Ltd. and British
Petroleum. From such comparison it appears that
the figures in Exhibit 1, Book 1, Document 21.1
are the quantities of crude oil that were to be
produced to Spur Oil Ltd. or otherwise Spur Oil
Ltd. might lose the British Petroleum processing
agreement or have to buy more crude oil from
British Petroleum.
It appears further from his evidence that Mr.
Bilger believed that he had to supply the quantities
referred to in Exhibit 1, Book 1, Document 21.1 at
$1.9876 U.S. per barrel.
It therefore is conclusive from the evidence that
the document Exhibit 1, Book 1, Document 21.1
was considered by the parties to be a valid contract
and all parties acted upon it pursuant to its terms
at all relevant times, including the taxation year
1970, notwithstanding the said agreements dated
February 1, 1970 between Tepwin and Spur Oil
Ltd.
It further is conclusive from the evidence that it
was never intended that the officers and directors
of Tepwin at Bermuda would exercise manage
ment and control of Tepwin's business in any
aspect. Instead, they were to carry out the instruc
tions given by officers and directors of Murphy Oil
Corporation at El Dorado, Arkansas, and to a
lesser degree in certain matters given by officers
and directors of Murphy Oil Company Ltd., at
Calgary, Canada, and Spur Oil Ltd. as detailed
above.
It appears also that the purpose of acquiring and
operating Tepwin was to use it as a vehicle to
repatriate tax-free dividends to its Canadian
parent company, Murphy Oil Company Ltd., at
Calgary, Alberta, by causing Tepwin to declare
such dividends.
The allegations and claims for relief of the
parties and then authorities are now detailed
hereunder.
Allegations and Claims for Relief
A. Spur Oil Ltd.'s allegations and claim for relief
in this action are that: "the sum of $1,622,728.55
... which was disallowed by the Minister, is prop
erly deductible from ... (Spur Oil Ltd.'s) income
in computing its taxable income for its 1970 taxa
tion year and (a declaration is claimed) directing
the Minister to reassess ... (Spur Oil Ltd.'s)
income accordingly reversing to the extent neces-
sary the consequential adjustments of capital cost
allowance and exploration and development costs".
B. The defendant's allegations and claims for relief
are:
1. The following is the applicable statutory law
in relation to the facts of this case, namely,
sections 3, 4, 12, 17, 23 and 137 of the Income
Tax Act, R.S.C. 1952, c. 148 prior to amend
ments in section 1 of c. 63, S.C. 1970-71-72.
2. Spur Oil Ltd. "carried on business through a
corporation in the name of Tepwin, and that at
no time during ... (Spur Oil Ltd.'s) 1970 taxa
tion year did Tepwin carry on business by itself
so as to earn or to otherwise be entitled to any
income, and that Tepwin was a device to artifi
cially increase the expenses of the ... (Spur Oil
Ltd.) for Canadian tax purposes while enabling
the resulting cash flow to be returned to the
Canadian Parent, Murphy Calgary, free of
Canadian income tax."
3. Spur Oil Ltd. "was not dealing with Tepwin
at arm's length and that ... (Spur Oil Ltd.)
purchases of crude oil from Tepwin made at a
price in excess of fair market value should be
deemed to have been made at the fair market
value thereof within the meaning of section 17
(1) of the Income Tax Act".
4. "the amount of $1,622,728.55 claimed by the
Plaintiff as a portion of the cost of its petroleum
products sold was not an outlay or expense
incurred for the purpose of gaining or producing
income from a business and was not deductible
within the meaning of section 12(1)(a) of the
Income Tax Act".
5. "the deduction of $1,622,728.55 in respect of
an expense claimed by the Plaintiff, should not
be allowed as that amount would unduly or
artificially reduce the income of the Plaintiff
within the meaning of section 137 (1) of the
Income Tax Act".
Authorities
Unduly or Artificially Reducing Income
Section 137(1) of the Income Tax Act, R.S.C.
1952, c. 148 reads as follows:
137. (1) In computing income for the purposes of this Act,
no deduction may be made in respect of a disbursement or
expense made or incurred in respect of a transaction or opera
tion that, if allowed, would unduly or artificially reduce the
income.
This statutory concept of "unduly" or "artifi-
cially" has been considered in many contexts,
including so-called sham transaction and artificial
transaction matters.
A. Sham Transactions
Sham transactions as considered in the cases
appear to be transactions in which the taxpayer
has used various technicalities or devices for the
purpose of tax avoidance. Sham transactions have
been defined by Lord Diplock in Snook v. London
& West Riding Investments, Ltd.' and his defini
tion has been adopted for Canadian income tax
purposes by the Supreme Court of Canada in
M.N.R. v. Camerons. Lord Diplock said at page
528:
As regards the contention of the plaintiff that the transac
tions between himself, Auto-Finance, Ltd. and the defendants
were a "sham", it is, I think, necessary to consider what, if any,
legal concept is involved in the use of this popular and pejora
tive word. I apprehend that, if it has any meaning in law, it
means acts done or documents executed by the parties to the
"sham" which are intended by them to give to third parties or
to the court the appearance of creating between the parties
legal rights and obligations different from the actual legal
rights and obligations (if any) which the parties intend to
create.
Seemingly expanding the definition of "sham"
the Court of Appeal of the Federal Court of
Canada appears to have added to this defined
concept of sham for tax purpose by appending the
concept of "business purpose". See M.N.R. v.
Leona per Heald J., and utilized by Cattanach J.
in Mendels v. The Queen 4 ; but see contrary
Massey Ferguson Ltd. v. The Queens per Urie J.
' [1967] 1 All E.R. 518 at 528.
2 [1974] S.C.R. 1062.
' [1977] 1 F.C. 249.
4 [1978] C.T.C. 404.
5 [1977] 1 F.C. 760.
B. Artificial Transactions
1. Lord Diplock in the Privy Council case of
Seramco Ltd. Superannuation Fund Trustees v.
Income Tax Commissioner 6 on an appeal from
Jamaica based on the consideration of the Jamaica
Income Tax Law 1954, section 10(1)' at page 107
makes a distinction between "artificial" and "ficti-
tious" (that is "sham") transactions as envisaged
by the words employed in section 10(1) of the
above Act. That section is in many ways analogous
to section 137(1) of the Canadian Income Tax Act
above quoted. Lord Diplock said:
"Artificial" is an adjective which is in general use in the
English language. It is not a term of legal art; it is capable of
bearing a variety of meanings according to the context in which
it is used. In common with all three members of the Court of
Appeal, their Lordships reject the trustees' first contention that
its use by draftsman of the subsection is pleonastic—that is a
mere synonym for `fictitious'. A fictitious transaction is one
which those who are ostensibly the parties to it never intended
should be carried out. `Artificial' as descriptive of a transaction
is, in their Lordships' view, a word of wider import.
Where in a provision of an Act an ordinary English word is
used, it is neither necessary nor wise for a court of construction
to attempt to lay down in substitution for it, some paraphrase
which would be of general application to all cases arising under
the provision to be construed. Judicial exegesis should be
confined to what is necessary for the decision of the particular
case....
2. The following categories of artificial transac
tions have been considered by the courts (and
undoubtedly there are many more categories):
(i) Inherently artificial transactions such as
capital cost allowance transactions, depletion
allowance transactions or other specific relieving
provisions as for example in section 66 of the
present Income Tax Act, all of which appear to
take precedence over the general anti-avoidance
provision in section 137 (1) of the Canadian
Income Tax Act (now section 245 (1) under the
current Act). See for example, Jackett C.J. in
The Queen v. Alberta and Southern Gas Co.
6 [1976] S.T.C. 100.
7 "Where the Commissioner is of opinion that any transac
tion which reduces or would reduce the amount of tax payable
by any person is artificial or fictitious, or that full effect has not
in fact been given to any disposition, the Commissioner may
disregard any such transaction or disposition, and the persons
concerned shall be assessable accordingly."
Ltd. 8 and Pratte J. in Produits LDG Products
Inc. v. The Queen 9 , and the obiter also in Harris
v. M.N.R. 1 ° Because of the particular facts of
the Harris (supra) case, perhaps that case
should be put in the category of artificial trans
actions referred to in (ii) below.
(ii) Transactions proven by evidence to be artifi
cial in which cases the Court has directly
applied Part I of the Act (i.e. the pre-1972 Act)
to uphold assessments for tax.
See for example, Judson J. in Smythe v.
M.N.R. " at page 69:
There is only one possible conclusion from an examination
of these artificial transactions and that must be that their
purpose was to distribute or appropriate to the shareholders
the "undistributed income on hand" of the old company. No
oral or other documentary evidence is needed to supplement
this examination. There was, however, an abundance of
other evidence. This was a well-considered scheme adopted
on the advice of professional advisers after other means of
extraction of the undistributed income—including payment
of a tax under the provisions of s. 105(b) of the Act—had
been weighed and rejected.
In this connection, while recognizing that cor
porations are distinct and separate legal persons
(see Salomon v. A. Salomon and Company,
Limited"; Pioneer Laundry & Dry Cleaners,
Limited v. M.N.R. 13 ; and The Commissioners
of Inland Revenue v. His Grace the Duke of
Westminster 14 ), it is always necessary to consid
er the essential realities of transactions done by
separate legal persons, individuals or corpora
tions, to determine whether or not the execution
of the transactions entered into by them is
within the principles of the Duke of Westmin-
ster case (supra) or whether the execution is
akin to a theatrical performance. Templeman
L.J. put the matter of this consideration in this
way at page 979 in W. T. Ramsay Ltd. v. Inland
Revenue Commissioners 18:
8 [1978] 1 F.C. 454; affirmed [1979] 1 S.C.R. 36.
9 [1976] C.T.C. 591.
10 [1966] S.C.R. 489 at 505.
" [1970] S.C.R. 64.
12 [1897] A.C. (H.L.) 22.
" [1940] A.C. (P.C.) 127.
14 [1936] A.C. (H.L.) 1.
15 [1979] 1 W.L.R. 974.
The facts as set out in the case stated by the special
commissioners demonstrate yet another circular game in
which the taxpayer and a few hired performers act out a
play; nothing happens save that the Houdini taxpayer
appears to escape from the manacles of tax. The game is
recognisable by four rules. First, the play is devised and
scripted prior to performance. Secondly, real money and real
documents are circulated and exchanged. Thirdly, the
money is returned by the end of the performance. Fourthly,
the financial position of the actors is the same at the end as
it was in the beginning save that the taxpayer in the course
of the performance pays the hired actors for their services.
The object of the performance is to create the illusion that
something has happened, that Hamlet has been killed and
that Bottom did don an ass's head so that tax advantages
can be claimed as if something had happened. The audience
are informed that the actors reserve the right to walk out in
the middle of the performance but in fact they are the
creatures of the consultant who has sold and the taxpayer
who has bought the play; the actors are never in a position to
make a profit and there is no chance that they will go on
strike. The critics are mistakenly informed that the play is
based on a classic masterpiece called "The Duke of West-
minster" but in that piece the old retainer entered the
theatre with his salary and left with a genuine entitlement to
his salary and to an additional annuity.
(iii) Some transactions that are not at arm's
length. Prima facie, the conclusion is that such
transactions are artificial.
(iv) Some transactions that are entered into by
so-called off-shore corporations where the man
agement and control of such off-shore corpora
tions is elsewhere than in such off-shore loca
tions. Prima facie, the conclusion is that the
transactions entered into by such off-shore cor
porations are artificial.
3. As to determining the residence of a corpora
tion and how a corporation operates, the following
should be recalled for the purpose of considering
whether or not any transactions that may be
entered into by a corporation are artificial within
the meaning of section 137(1) of the Income Tax
Act:
In the Income Tax Act, persons resident in
Canada are taxable upon their world-wide
income; whereas taxpayers not resident in
Canada are taxable only upon income earned in
Canada. A corporation is a person for the pur
poses of the Income Tax Act. A corporation
may not consolidate its income from subsidiary
corporations for the purpose of the Canadian
income tax.
If a corporation is resident in Canada, it must
file returns and pay Canadian income tax. The
basic test of corporate residence is established in
the English jurisprudence in the case of De
Beers Consolidated Mines, Limited v. Howe 16
namely [at page 458], "[the] company resides
for purposes of income tax where its real busi
ness is carried on.... and the real business is
carried on where the central management and
control actually abides".
Ordinarily, the central management and con
trol of a corporation is found to be where the
directors of the corporation meet and exercise
management and control of the corporation and
its affairs.
It has been held that a corporation may be
resident in more than one jurisdiction if the
central management and control of the corpora
tion is exercised in more than one country:
Swedish Central Railway Company, Limited v.
Thompson". It may be that such dual residence
should be found infrequently: Egyptian Delta
Land and Investment Company, Limited v.
Todd 18 and Koitaki Para Rubber Estates Lim
ited v. The Federal Commissioner of
Taxation 19 .
The said English test with respect to the
determination of the residence of a corporation
for tax purpose based on its management and
control is applicable in Canada. In British
Columbia Electric Railway Company, Limited
v. The King 20 , the Privy Council on an appeal
from the Supreme Court of Canada held that a
company incorporated in the United Kingdom
was resident in Canada on the basis of control
exercised in Canada.
16 [1906] A.C. (H.L.) 455.
" [1925] A.C. (H.L.) 495.
18 [1929] A.C. (H.L.) 1.
19 (1940-41) 64 C.L.R. 15.
20 [1946] A.C. (P.C.) 527.
The state of mind of directors and managers
of a company is treated in law as being the
directing mind and will of such a company and
control of what it does. Lord Justice Denning in
H. L. Bolton (Engineering) Co. Ltd. v. T. J.
Graham & Sons Ltd. 2' at page 172 said:
A company may in many ways be likened to a human body.
It has a brain and nerve centre which controls what it does.
It also has hands which hold the tools and act in accordance
with directions from the centre. Some of the people in the
company are mere servants and agents who are nothing
more than hands to do the work and cannot be said to
represent the mind or will. Others are directors and manag
ers who represent the directing mind and will of the com
pany, and control what it does. The state of mind of these
managers is the state of mind of the company and is treated
by the law as such. So you will find that in cases where the
law requires personal fault as a condition of liability in tort,
the fault of the manager will be the personal fault of the
company. That is made clear in Lord Haldane's speech in
Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd.
([1915] A.C. 705, 713-14; 31 T.L.R. 294). So also in the
criminal law, in cases where the law requires a guilty mind
as a condition of a criminal offence, the guilty mind of the
directors or the managers will render the company itself
guilty. That is shown by Rex v. I.C.R. Haulage Ltd.,
([1944] K.B. 551; 60 T.L.R. 399; [1944] 1 All E.R. 691) to
which we were referred and in which the court said ([1944]
K.B. 551, 559): "Whether in any particular case there is
evidence to go to a jury that the criminal act of an agent,
including his state of mind, intention, knowledge or belief is
the act of the company ...."
An example of the affirmation of this princi
ple is the case of The Lady Gwendolen 22 :
Useful guidance on how the mind and will of a company
may be manifested is also to be found in the judgment of
Lord Justice Denning (as he then was) in H. L. Bolton
(Engineering) Company, Ltd. v. T. J. Graham & Sons, Ltd.,
[1957] 1 Q.B. 159, at pp. 172 and 173. The learned Lord
Justice there said:
... A company may in many ways be likened to a human
body. It has a brain and nerve centre which controls what
it does. It also has hands which hold the tools and act in
accordance with directions from the centre. Some of the
people in the company are mere servants and agents who
are nothing more than hands to do the work and cannot be
said to represent the mind or will. Others are directors
and managers who represent the directing mind and will
of the company, and control what it does. The state of
mind of these managers is the state of mind of the
company and is treated by the law as such. So you will
find that in cases where the law requires personal fault as
a condition of liability in tort, the fault of the manager
21 (1957) 1 Q.B. 159.
22 [1965] 1 Lloyd's Rep. 335 at pp. 345-346.
will be the personal fault of the company. That is made
clear in Lord Haldane's speech in Lennard's Carrying Co.
Ltd. v. Asiatic Petroleum Co. Ltd... .
A little later Lord Justice Denning said:
So here, the intention of the company can be derived
from the intention of its officers and agents. Whether
their intention is the company's intention depends on the
nature of the matter under consideration, the relative
position of the officer or agent and the other relevant facts
and circumstances of the case ....
On the principles stated in these cases I should be dis
posed to say that actual fault on the part of Mr. Boucher, as
registered ship's manager and head of the traffic depart
ment, would be sufficient in the particular circumstances of
the present case to constitute actual fault or privity of the
company. But I do not find it necessary to reach any final
conclusion upon this point—for it seems to me that in the
particular circumstances of this case all concerned, from the
members of the board downwards, were guilty of actual
fault, in that all must be regarded as sharing responsibility
for the failure of management which the facts disclose.
Certainly I would not dissent from the view expressed by the
learned Judge . that Mr. D. O. Williams, the responsible
member of the board, must be regarded as guilty of actual
fault.
The following are the considerations which impel me to
that conclusion. I agree with the submission made on both
sides that the test to be applied in judging whether shipown-
ers have been guilty of actual fault must be an objective test.
A company like the plaintiff company, whose shipping
activities are merely ancillary to its main business, can be in
no better position than one whose main business is that of
shipowning. It seems to me that any company which
embarks on the business of shipowning must accept the
obligation to ensure efficient management of its ships if it is
to enjoy the very considerable benefits conferred by the
statutory right to limitation. [Emphasis added.]
4. In reference to the transactions listed in para
graph 2(iii) and (iv) above, (namely certain non-
arm's length transactions and transactions entered
into by so-called off-shore corporations) there is an
onus to adduce evidence to rebut such prima facie
conclusion. If it is not rebutted, then a finding that
the transaction is artificial will result; and taxation
will be determined by a direct application of Part I
of the Act. (The reference to Part I of the Act is to
the Income Tax Act prior to the Act as amended
by Statutes of Canada of 1970-71-72, c. 63 which
came into force on January 1, 1972.)
Conclusions
The question therefore for determination in this
case is whether or not the transactions entered into
as of February 1, 1970, namely:
(a) the "sub-charter of affreightment" between
Tepwin and Spur Oil Ltd. (Exhibit 1, Book 1,
Document 42);
(b) the crude oil sales agreement between
Murphy Oil Trading Company and Tepwin
Company Limited (Exhibit 1, Book 1, Docu
ment 43); and
(c) the delivery of crude oil agreement between
Tepwin and Spur Oil Ltd. (Exhibit 1, Book 1,
Document 44)
are artificial transactions within the meaning of
section 137(1) of the Income Tax Act.
On the facts in this case such a determination
must be based on either (1) the residence of
Tepwin and what it did at the material times; or
(2) the validity or not of the so-called contract
dated August 2, 1968, Exhibit 1, Book 1, Docu
ment 21.1 between Spur Oil Ltd. (formerly
Murphy Oil Quebec Ltd.) and Murphy Oil Trad
ing Company (the Delaware Corporation); or (3)
both bases.
The evidence established that the management
and control of the off-shore corporation Tepwin
was not in Bermuda. And instead of evidence
being adduced to rebut the prima facie conclusion
arising from that fact, the evidence adduced estab
lished conclusively that the management and con
trol of Tepwin was divided between El Dorado,
Arkansas and Canada and Tepwin was therefore
resident in those locations and not in Bermuda at
all material times. As a consequence, it was proven
that all decisions by Tepwin to enter into the three
contracts, Exhibit 1, Book 1, Documents 42, 43
and 44 by Tepwin with Spur Oil Ltd. and the
actual execution of these contracts by Tepwin were
made and done by Tepwin while resident in both
El Dorado, Arkansas and Canada.
The evidence further established that the offi
cers and directors of Tepwin at Bermuda had
nothing to do with the purchase of crude oil from
the Persian Gulf area or from the spot market or
with the delivery of it to Portland, Maine for
on-going pipeline delivery to Montreal or with the
sale of the crude oil to Spur Oil Ltd.; and specifi
cally also that Tepwin did not do so at Bermuda by
way of any of its officers or directors qua Tepwin
who personally were resident in El Dorado, Arkan-
sas or in Canada either.
The evidence further established that what the
officers and directors and the solicitors at Ber-
muda did was act merely as scribes under the
direction of Mr. Watkins from El Dorado, Arkan-
sas for the purpose of having Directors' meetings
declaring dividends, which dividends were passed
tax free to the Canadian parent company and
which dividends as to the amount of each were
based on the quantum of the so-called Tepwin
charge times the number of gallons of crude oil in
each shipload which left the Persian Gulf for
delivery to Portland, Maine and then by pipeline to
Montreal, Canada. Other than that, they did prac
tically nothing because Tepwin did not carry on
the business of buying, selling and delivering crude
oil in 1970.
The evidence also conclusively established that
Murphy Oil Trading Company (the Delaware
Corporation) prior to and up to February 1, 1979,
did in fact sell crude oil to Spur Oil Ltd. at
$1.9876 U.S. per barrel under the so-called con
tract between them (Exhibit 1, Book 1, Document
21.1); and this contract document was never for
mally or informally abrogated.
Exhibit 1, Book 1, Document 21.1, therefore, at
all material times was a valid and subsisting
contract.
As a consequence, these three transactions evi
denced by the three contracts, Exhibit 1, Book 1,
Documents 42, 43 and 44, are artificial within the
meaning of section 137(1) of the Income Tax Act.
Accordingly by direct application of Part I of the
Income Tax Act, the finding is that the excess cost
of petroleum products sold, the excess being the
total of the so-called Tepwin charge, in computing
the net income from the 1970 taxation year of
Spur Oil Ltd. is not an allowable expense.
The appeal is therefore dismissed with costs, but
the assessment is referred back for re-assessment
not inconsistent with these reasons.
Counsel may prepare in both official languages
an appropriate judgment to implement the forego
ing conclusions and may move for judgment in
accordance with Rule 337(2)(b). Judgment shall
not issue until settled by the Court.
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.