Hutchinson, J.:—Two companies, Precambrian Shield Resources Limited (the plaintiff or Precambrian) and Dover Park Development Corporation Ltd. (Dover Park) entered into a conveyance and management agreement dated May 14, 1985 (the carve-out agreement). By virtue of a direction of the Provincial Treasurer for Alberta dated October 31, 1986 issued by the Director of Audits for the Alberta Treasury Corporate Tax Administration, the two companies were deemed to be associated with each other and hence could only claim the maximum allowable Alberta Royalty Tax Credit allocated between them. The effect of the direction was to reduce the amount of Alberta Royalty Tax Credit claimed by the plaintiff Precambrian in 1985 by approximately $490,000 and a similar reduction in 1986. Precambrian filed a notice of objection pursuant to the Alberta Corporate Income Tax Act, R.S.A. 1980, ch. A-17 (the Act) setting out the reasons for the objection and all relevant facts stating that it wished to appeal immediately to the court and waived reconsideration of the assessment by the Provincial Treasurer. This prompted a reply to the notice of appeal by the Provincial Treasurer pursuant to subsection 51(1) of the Act. Precambrian then filed a statement of particulars and the Provincial Treasurer replied to the statement of particulars. All of the foregoing documents constitute the pleadings in this action.
The powers of the court defined as the Court of Queen's Bench, are found in subsections (3) and (4) of Section 52 of the Act quoted as follows:
52 (3) The court may
(a) dismiss the appeal, or
(b) allow the appeal, and
(i) vacate the assessment,
(ii) vary the assessment,
(iii) restore the assessment, or
(iv) refer the assessment back to the Provincial Treasurer for reconsideration and reassessment.
(4) The court may, in delivering judgment on an appeal, order payment or repayment of tax, a refundable tax credit, interest and penalties or costs by the taxpayer or the Provincial Treasurer.
For the reasons expressed below I have dismissed the plaintiff's appeal.
The main issue to be considered is whether the discretion given to the Provincial Treasurer pursuant to subsection 26.1(10) of the Act to direct that the two corporations shall be deemed to be associated with each other was properly exercised. This issue concerns not only the legitimacy of invoking the statutory discretion to deem two companies to be associated, but also involves a consideration of the way in which the discretion came to be exercised. That is whether the Director of Audits could issue the direction contemplated by subsection 26.1(10) of the Act.
The Royalty Tax Credit program came into effect in 1982 and was a royalty reduction credit aimed primarily at small companies producing oil and gas on which Alberta crown royalties were payable. The program was part of the fallout resulting from the confrontation which had taken place between the federal government and the western oil and gas producing provinces and Alberta in particular over the division of resource revenues resulting from the increase in oil and gas prices due to the activities of the oil producing and exporting countries (OPEC). When OPEC began to dramatically increase the price of oil in the early 1970s, the Alberta government determined to increase its historical share of crown royalties resulting from the leasing of oil and gas underlying Alberta crown lands. The federal government enacted legislation which disallowed the deduction of the provincial crown royalties when calculating federal income tax. By disallowing the provincial crown royalty payments when calculating federal income tax, the oil and gas companies became taxable on "phantom income" that is income that they had never received having paid it to the provincial government in the form of crown royalties. The oil and gas companies became pawns in the confrontation between the two levels of government. Oil and gas activity in the western provinces declined dramatically and various federal and provincial incentive programs were introduced to stimulate the oil and gas industry. In 1982 the Alberta government introduced a Royalty Tax Credit, which was limited by the producer's "maximum allowable credit" and the "specified percentage" of crown royalty which could be used in each year in order to calculate the amount of credit that could be gained in each year. In the year in question, that is to say 1985, the specified percentage was 50 per cent and the maximum royalties affected were $4 million resulting in a maximum allowable credit of $2 million.
The existence of the maximum allowable credit led some oil and gas producers who had reached or were about to reach the maximum allowable credit to try to find means to expand the scope of Alberta Royalty Tax Credits by splitting off production to small producers who in turn could claim their own Alberta Royalty Tax Credit up to a separate maximum allowable credit. The multiplication of credits was met by the Alberta government enacting antiavoidance rules whereby associated companies could only claim or share one maximum allowable credit in any one year regardless of the amount of production in any one of the associated corporations. The Act adopted and expanded the association rules developed in the federal act to prevent multiplication of the small business deduction.
Subsections (9) and (10) of section 26.1 of the Act provide as follows: (9) Notwithstanding section 26(3), if the Provincial Treasurer is satisfied that
(a) the separate existence of 2 or more corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and
(b) 1 of the main reasons for the separate existence of the corporations in that year is to increase the amount of royalty tax credit that would otherwise be determined under this Act,
the Provincial Treasurer may direct that all of the corporations shall be deemed to be associated with each other for the purposes of this Division.
(10) Notwithstanding section 26(3), if in the opinion of the Provincial Treasurer, 2 or more corporations have at any time entered into 1 or more sales, exchanges, declarations of trust or other transactions that
(a) lack of any substantial business purpose, other than increasing the aggregate amount of the royalty tax credit that may be claimed, or
(b) artificially increase the royalty tax credit that may be claimed,
the Provincial Treasurer may direct that all of those corporations shall be deemed to be associated with each other for the purposes of this Division.
We are here dealing with the effect of a carve-out agreement entered into between Precambrian and Dover Park. In general terms a carve-out agreement in the oil and gas industry is an agreement whereby a producing company sells or conveys an interest in a producing property to a third party on terms that, given the receipt by the purchaser of a predetermined sum of money from the proceeds of production, the property is then reconveyed to the original vendor. The interest conveyed, sometimes called a “terminating working interest", has been "carved-out" of the vendor's interest but only for that period of time which is required in order to match an agreed upon return to the purchaser. The vendor's incentive is to obtain immediate cash to apply to its own corporate objectives and the purchaser is often in need of income to offset tax losses and to take advantage of tax incentives available to producers of oil and gas.
In this case the catalyst in the formation of the carve-out agreement was a firm of chartered accountants which acted for each of Precambrian and Dover Park. Precambrian is a producing oil and gas company and Dover Park had large losses carried over from previous years. Dover Park had not previously been in the oil and gas business in any capacity. The proposed arrangement would work this way. Dover Park would borrow $14 million from a bank to finance the purchase from Precambrian of a working interest in several producing oil and gas properties in Alberta. When the net proceeds of production received by Dover Park from the oil and gas interest conveyed to it by Precambrian equalled the “termination amount", all but a small percentage of the working interest would be reconveyed to Precambrian with an option granted to Precambrian to repurchase the small percentage interest remaining for a specified sum (the Option Price). This latter transaction involved a recapture of certain Canadian oil and gas property expenses with which we are not concerned here. Precambrian would be free to use the purchase moneys of $14 million for whatever purpose it deemed most appropriate, as for example the redemption of certain preferred shares which had to be redeemed in the year of the sale and Dover Park could expect to receive some cash flow over and above the repayment of the bank loan taken out to finance the purchase. The calculation of the net proceeds amount and the termination amount are quite complex but in essence the two funds represent accumulating amounts. I have attached as Exhibit A to my judgment a further explanation of the calculations which has been approved by the solicitors for each party. The termination amount represents the initial purchase price of $14 million plus 15 per cent of Dover Park’s notional taxable income plus interest at prime plus 3/4 per cent (the amount charged to Dover Park on its bank loan financing the purchase) and the Option Price of $75,000. The net proceeds amount represents the proceeds received from the production of oil and gas from the working interest conveyed by Precambrian to Dover Park less operating costs, Federal Petroleum and Gas Revenue Tax (PGRT) net of PGRT tax credits, Alberta crown Royalty net of Alberta Royalty Tax Credits and management costs. Precambrian purchased a portion of the Dover Park's tax losses by having 15 per cent of Dover Park's notional taxable income added to the termination amount and Precambrian also expanded its Alberta Royalty Tax Credits by having only the net amount of Alberta crown royalty deducted from the net proceeds amount thus accelerating the time when the two funds would equal one another, the “termination point" at which time the working interest would be reconveyed to Precambrian and the proceeds of production would then return to it.
It is the application of Alberta Royalty Tax Credit towards the recovery of the working interest by Precambrian which concerned the Alberta Corporate Tax Administration Department because the formula by which the funds were created had the effect of increasing the maximum allowable credit available to Precambrian beyond the $2 million maximum allowable credit by employing the Alberta Royalty Tax Credit available to Dover Park as a deduction from Alberta Crown Royalty when calculating the net proceeds fund.
The effect of these so-called "carve-out" agreements on the use of Alberta Royalty Tax Credit in the oil and gas industry concerned the Corporate Tax Administration of the Alberta Treasury and that branch of the Alberta Treasury began a review of such agreements including the conveyance and management agreement dated May 14, 1985 entered into between Precambrian and Dover Park. On July 7, 1986 the Alberta Corporate Tax Administration wrote to Precambrian advising that the department "considers that it may be appropriate to issue a direction under subsection 26.1(10) of the Act deeming Precambrian and Dover Park to be associated with each other for the purpose of part 6 division 1 of the Act.
The solicitors for Precambrian responded by letter dated July 31, 1986 setting out why Precambrian, its auditors and tax advisors and themselves believed that such action would be inappropriate. There followed a meeting between the officers of the department, the chartered accountants and the solicitors for Precambrian on August 18, 1986 where the issues involved were again canvassed as well as the findings of the audit undertaken by the Alberta Corporate Tax Administration. Again the solicitors for Precambrian responded to the matters raised in the meeting by letter dated August 22, 1986 addressed to Alberta Corporate Tax Administration. On October 6, 1986 the then president of Precambrian wrote to the Provincial Treasurer for Alberta expressing concern over the proposed action by his department and the effect such action would have on the cash flow available to his company and the consequences on the company's exploration, seismic and drilling programs. The Provincial Treasurer responded by letter, apparently received by Precambrian on October 15, 1986 stating as follows:
Further to your letter of October 6, 1986, I have reviewed these matters with my officials and am informed that it appears we have a basis to consider deeming Precambrian Shield Resources Limited and Dover Park Development Corporation Ltd. associated for purposes of sharing the maximum Royalty Tax Credit pursuant to section 26 of the Alberta Corporate Income Tax Act.
If the final decision is to exercise the discretion, then a detailed explanation would be provided outlining the rationale that was used. The explanation would address the concerns that you have raised in your correspondence to us.
As you may be aware, Alberta Treasury has long been concerned with the multiplication of Royalty Tax Credits as evidenced by the extensive antimultiplication provisions in the legislation and the recent amendments to further strengthen the Act in this area. Although there may be a benefit to Alberta through the additional cash flow generated by the Royalty Tax Credit, the Act clearly sets out limits to the credits that are available to corporations. The Royalty Tax Credit was not intended to provide the type of financing in the manner as contemplated by the above-noted transaction.
I am sorry I cannot respond more favourably at this time. Maintaining the integrity of the Royalty Tax Credit program is of paramount importance which is demonstrated by the granting of discretionary powers to the Provincial Treasurer by the Legislature. The exercise of the application of a discretionary provision is not a matter that is taken lightly and great care is being taken to ensure that all information submitted by the parties to this transaction is taken into consideration, in arriving at an appropriate decision.
The officials of the Alberta Corporate Tax Administration and in particular Mr. C.J. Calarco, Director of Audits, continued to study the matter and in October of 1986 a direction was prepared for the signature of C.J. Calarco and submitted to A.H. Kalke, the Assistant Deputy Provincial Treasurer for Revenue, for his approval. The issuance of the direction was approved by Mr. Kalke on October 30, 1986 and Mr. Calarco was authorized to exercise the discretion of the Provincial Treasurer as provided in subsection 26.1(10) of the Act to direct that Precambrian and Dover Park be deemed to be associated with each other for the purposes of division 1 of part 6 of the Act for the 1985 taxation year. This Mr. Calarco did on October 21, 1986 by letter entitled “Direction” addressed to Precambrian summarizing the reasons given for the direction, the representations made, the facts found by the department, the Provincial Treasurer's opinion as well as the taxpayers' submissions.
Some of the pertinent portions of the direction letter are quoted as follows:
In April 1986, Alberta Treasury officials commenced an audit of the Vendor and the Purchaser with a view to reviewing royalty tax credits claimed by the Vendor and the Purchaser under the Act. The audit was carried out principally at the premises of the Vendor and Purchaser in Calgary, with the participation and full co-operation of the Vendor and the Purchaser. It included a review of the carve-out agreement and various ancillary and supporting agreements, documents and opinions, financial projections and proposals and correspondence relating to the Carve-Out Transactions, and interviews with officials of the Vendor and the Purchaser. The Vendor and the Purchaser were made aware of the documentation which was being collected and reviewed by Alberta Treasury, and the parties who were being interviewed.
The direction letter summarized the documents and evidence that had been relied upon as well as the facts or inferences relating to the carve-out transactions which were found to be of particular relevance in connection with direction.
Portions of the letter entitled “Provincial Treasurer's Opinion" are quoted from the direction letter as follows:
In this particular case, the Provincial Treasurer is of the opinion that the Carve- Out Transactions artificially increase the royalty tax credit that may be claimed, within the meaning of paragraph 26.1 (10)(b) of the Act. The “business purpose" of the Carve-Out Transactions, as may be inferred from the documents and as has been explained to Alberta Treasury officials, appears to be raising funds for the Vendor at the lowest after-tax cost, and providing the Purchaser with secure revenue at the highest after-tax rate. The reduction of current income taxes payable by the Vendor was made possible, in part, by the ability of the Purchaser to "shelter" income with its non-capital losses. Whether or not reduction of income tax can be regarded as a "business purpose" for purposes of paragraph 26.1 (10)(a), the “financing” motivation has been accepted by the Provincial Treasurer as a business purpose. However that purpose is relevant in considering the application of paragraph 26.1(10)(b).
The Provincial Treasurer is of the opinion that the Carve-Out Transactions increase the royalty tax credit artificially because such an increase was not the result of normal commercial transactions, viewed in the context of Division 1 of Part 6 of the Act. The scheme of the royalty tax credit suggests that the credit may be increased where there is additional business activity which creates additional Alberta crown royalty. That is not the case in the Carve-Out Transactions. As well, aside from the rules relating to restricted resource properties, there may be additional royalty tax credits where a producing resource property is sold outright in a anormal commercial transaction to another corporation with which the seller is not associated. In such a purchase and sale of resource properties, resulting in an acceptable and normal increase in royalty tax credits which would not be regarded as “artificial”, the purchaser would generally assume the economic risks relating to production and prices, and be seen to be embarking upon a lasting business undertaking. Such a purchaser would derive benefit from the royalty tax credit as an effective reduction or rebate of his Alberta crown royalties. While the Provincial Treasurer has not concluded that the Carve-Out Transactions were legally ineffec- tive, or that they constituted a "sham", in the circumstances the case is an appropriate one for invoking the discretionary provisions of section 26.1(10). While the legal result of the Carve-Out Agreement may be to "grant and convey” an item of property, in particular the terminating Term Interest, the overall economic result and purpose of the transactions is to enable the Vendor to obtain temporary funds at an attractive after-tax rate, and to enable the Purchaser to earn income for a determinable period at an attractive rate. This is confirmed by several aspects of the Carve-Out Agreement referred to above.
Alberta royalty tax credit may be increased where there is additional Alberta crown royalty, or where there is a normal commercial sale of property to a purchaser producing lasting economic results and where the business purposes of the transaction may be said to be an outright sale of resource properties with all the usual commercial consequences as to risk and reward. The Provincial Treasurer is of the opinion that one result of the Carve-Out Transactions is to synthesize an abnormal or artificial amount of royalty tax credit, having regard to the substance and effect of the Carve-Out Transactions, the scheme of Division 1 of Part 6 of the Act and the object and spirit of these statutory provisions and the discretionary requirements in section 26.1(10).
The direction letter then reviewed the taxpayers' submissions and purported to answer each one.
The testimony of Theodore Henry Renner who was president and chief executive officer of Precambrian in 1985 was to the effect that Alberta Royalty Tax Credit did not play a role as to whether it would continue negotiations with Dover Park. In using the tax pools of Dover Park it was understood that there were possible ramifications but there was no comfort given that the use of tax pools would be there. Dover Park would be assuming all production risks and pricing risks and Precambrian gave no assurances or guarantees relating to Dover Park's bank loans. His primary concern with Dover Park lay in the viability of the company. The prospect of having to deal with a receiver disturbed him. He said that this concern proved to be justified as events unfolded when Dover Park went into receivership in 1986. Renner confirmed this was the only carve-out transaction in which Precambrian had been involved and that the result of the carve-out was to postpone the time when Precambrian would find itself in a taxable position. Renner also acknowledged that Precambrian would be paying something for the utilization of Dover Park's tax pool. Royalty Tax Credit was a factor but there was no comfort that it would be there. The whole concept was in jeopardy having regard to the possibility of legislative changes.
James Kenneth Wilson was the controller of Precambrian in 1985 and is now the vice-president of finance. In large measure he was responsible for negotiating the carve-out agreement following the introduction of the concept by the accountants and the identification of Dover Park as a potential party to the agreement. He together with Paul King, the then vice-president of finance, chose the properties to be conveyed to Dover Park and Wilson was aware of the letters from the accountants outlining the transaction and the opinions expressed in the letters. Wilson confirmed that the properties to be conveyed to Dover Park were not restricted properties. Dover Park did not then have any restricted properties. He testified that there were twofold reasons for the transaction, the first to provide Precambrian with funds to assist in the redemption of $20 million issue of preferred shares and secondly to assist in a large corporate exploration program involving drilling, seismic exploration, land acquisition and expansion of production facilities. The carve-out arrangement was a more tax effective method of raising capital. Although originally interested, the Continental Bank declined to finance the transaction for Dover Park because it felt that [there] were too few producing properties to support the loan and that the risk was too high. Precambrian's bank was substituted and the $50,000 banker's fee was advanced to Dover park by Precambrian and repaid out of the first month's production.
Wilson testified that even without the Alberta Royalty Tax Credit being credited to Precambrian as a result of the transaction, Precambrian would have entered into the transaction in any event. He confirmed that Dover Park assumed all of the risks of production being shut down as well as the risks of prorationing and price reduction. At that time oil prices were $35 per barrel compared to subsequent prices of one-half of that in 1986 resulting in the deal being projected to last for a much longer term. Precambrian remained as manager of the properties because it had the experience whereas Dover Park did not and the terms of the operating agreement in which a third company was named as operator would not permit recognition of Dover Park. Wilson confirmed on cross-examination that if the Alberta Royalty Tax Credit payable to Dover Park and which accelerated the pay-out to Precambrian were added to the Alberta Royalty Tax Credit received by Precambrian, then the combined total would exceed Precambrian's maximum allowable credit of $2 million. He also confirmed that the disposition of Precambrian's interest in an undivided interest in the producing properties to Dover Park was made for legal and tax purposes that had financing ramifications and that the risks to Dover Park were not onerous.
The only other witness, Charles Joseph Calarco, was called on behalf of the Province of Alberta. He was the Director of Audits in 1985 and as the name implies he was responsible for the Administration of Audits under the Alberta Corporate Income Tax Act. Audits are carried out on a random basis and on a representative number [of] organizations as well as special audits on new companies or a number of companies where there was a claim for particular benefit under the Act. In the summer of 1985, carve-out transactions were under review because of a significant increase in royalty tax credits being claimed. The effect of carve-out agreements on corporate income tax had previously been reviewed and legislative amendments put in place thereafter. Dover Park was identified as a first time claimant for Royalty Tax Credits and upon investigation the source of its producing interest was given as Precambrian. The review by the Calgary office of the Audit Department found its way to the Director of Audits and was discussed with the Director of Interpretation and Appeal, counsel and subordinate staff and the audit report and supporting documentation was sent to J.R. Allen, the Director of Interpretation and Appeals. The transmittal letter from Calarco to Allen dated June 18, 1986 states in part as follows:
There is no evidence to suggest that this transaction is incomplete or otherwise a sham. The parties apparently attempted to structure the transaction in accordance with the transaction that was at issue in the Alberta and Southern case.
The result was that an opinion was given that the transaction between Precambrian and Dover Park could be regarded as artificially increasing royalty tax credit and it was decided to hear from the taxpayers as mentioned previously. The sources of the department's information were revealed to Precambrian and copies of the interview notes with Dover Park were requested and subsequently sent to the solicitors for Precambrian following clearance from Dover Park but after the direction letter had issued.
Mr. Calarco assisted in preparing the letter from the Provincial Treasurer to Mr. Renner in response to the letter written by Mr. Renner to Mr. Johnston.
After additional consultation within the department, Mr. Calarco formed the opinion that royalty tax credit had been artificially increased as a result of the conveyancing and management agreement and he drafted a direction letter for review by counsel. A resulting clean draft was then passed on to the Assistant Deputy Provincial Treasurer for Revenue, A.H. Kalke, with a request for permission to release the letter. This occurred and the letter was sent to Precambrian and Dover Park. Mr. Calarco had the administrative authorization from the Provincial Treasurer under the Financial Administration Act to exercise the discretion given to the Provincial Treasurer under subsection 26.1(10) subject only to the restriction of obtaining any direction that may be given by the Assistant Deputy Provincial Treasurer, Mr. Kalke.
On cross-examination Mr. Calarco testified that carve-out agreements were "grandfathered" for income tax purposes in respect of property acquired before July 20, 1985 where contractual arrangements were in place that could not be terminated by October 31, 1985. He stated that these provisions did not supplant anti-avoidance legislation and in particular section 13 of the Act continued to apply federal tax legislation to artificial transactions as well as the specific provisions of the Act relating to Alberta Royalty Tax Credits.
Before Precambrian entered into the carve-out agreement, it attempted on several occasions to gain reassurance from its accountants that the transaction was free from the risk of loss of any portion of Alberta Royalty Tax Credits. Such assurance was not forthcoming.
Plaintiffs Argument
The plaintiff advises that it is not pursuing its objection that certain of the documents obtained or compiled by the Alberta Corporate Income Tax Administration were not made available to the plaintiff until after the direction had issued. These documents were in the form of notes of interviews which took place between representatives of the Alberta Corporate Tax and Finance Administration and Dover Park officials whose permission to circulate the notes was sought before they were distributed. Neither is the plaintiff pursuing its initial objection wherein it challenged the delegation of authority from the Provincial Treasurer to Mr. Calarco, to issue the direction deeming Precambrian and Dover Park to be associated for the purpose of calculating maximum Alberta Royalty Tax Credits.
The plaintiff continues to challenge the validity of the direction letter on two grounds, firstly on the ground that the discretion given to the Provincial Treasurer pursuant to paragraph 26.1(10)(b) to direct that Precambrian and Dover Park shall be deemed to be associated with each other was improperly or illegally exercised and secondly, that the decision was effectively made by Mr. Kalke who was someone other than the person who heard the submissions and who received the written submissions, that is to say Mr. Calarco, Director of Audits.
In pursuing its arguments the plaintiff has assumed that the defendant province has conceded that the direction was not made pursuant to paragraph 26.1(10)(a) of the Act where the Provincial Treasurer must form an opinion that two or more corporations have at any time entered into one or more sales, exchanges, declarations of trust or other transactions that lack any substantial business purpose, other than increasing the aggregate amount of the royalty tax credit that may be claimed. Accordingly the plaintiff focuses its attention on paragraph (b) of the above section where the Provincial Treasurer may direct that corporations shall be deemed to be associated where he forms the opinion that two or more corporations have at any time entered into one or more sales, exchanges, declarations of trust of other transactions that artificially increase the royalty tax credit that may be claimed. The section of the direction letter previously quoted makes that clear but I note that the direction letter does not concede that the financing motivation which meets the "business purpose" test in paragraph 26.1(10)(a) is not relevant in considering the application of paragraph 26.1(10)(b).
The argument of the plaintiff concentrates upon the relatively small portion of the direction letter dated August 31, 1986 already quoted in facts set out above.
The plaintiff argues that a claim for Alberta Royalty Tax Credit does not depend upon the quality of the transaction for its entitlement but rather Alberta Royalty Tax Credit does depend for its entitlement upon whether or not crown royalty has been paid and whether the taxpayer is unable to deduct the crown royalty under the Income Tax Act. It says that both of such requirements have been met here.
The plaintiff contends that the Provincial Treasurer's opinion when interpreting the scheme of the Act is dependent upon several erroneous assumptions which are not supported by the wording of the Act. The first is that there is a need for additional business activity which creates additional Alberta crown royalty. The plaintiff argues that the scheme or purpose of the Act is to reduce the royalty burden for those charged with the responsibility of paying crown royalties in order to improve the financial position of such parties and not to increase the amount of royalties being received by the province by creating additional business activity. The plaintiff says that there is no linkage contained within the Act between the reduction of the burden of crown royalties and activity creating more crown royalty. Alberta Royalty Tax Credit is not a drilling incentive program. No strings are attached to the payment of Alberta crown royalty credit.
Secondly the plaintiff questions the Provincial Treasurer's assumption that additional royalty tax credits are only available where a producing resource property is sold outright in a normal commercial transaction where the purchaser would generally assume the economic risks related to production and prices and where the purchaser would be seen to be embarking upon a lasting business undertaking. The plaintiff says that such an assumption is absent from the plain wording of the Act and in any event argues that here the production interests conveyed are not abnormal and in any event such interests need not be of a permanent or lasting effect in order to be normal. The Act does not differentiate between types of petroleum interests and to infer otherwise would result in an undue reading down of the Alberta Royalty Tax Credit entitlement.
The plaintiff points out that as of May 1985 restricted resource properties were defined as “any right or interest of any nature.” Paragraph 26(1)(f) defines restricted resource properties as follows:
(f) . . . any right or interest of any nature whatsoever or howsoever described or part thereof in any production from a petroleum or natural gas well in Alberta with a finished drilling date on or before August 24, 1982 where the right or interest or part thereof was owned by an above-limit corporation .. . .
Nowhere does the Act say that a disposition of property by an above-limit corporation would result in no royalty tax credit except as it relates to the concept of a restricted resource property and that restriction relates to any right or interest of any nature whatsoever or howsoever described tied to a drilling date of on or before August 24, 1982. Such an interest will not attract a tax credit. The plaintiff says that these definitions are useful in interpreting the scope of the Act on this point. An above-limit corporation is defined in paragraph 26(1)(a) of the Act to mean:
(a) “above-limit corporation" means a corporation that
(i) would, if its taxation year for the purposes of computing its income under the federal Act and this Act had been the 12 month period ending August 31, 1982, have had Alberta crown royalty for that taxation year in excess of $5 333 333.
(ii) was associated with one or more corporations on August 24, 1982 pursuant to subsection (1.6) and the corporation and all of the corporations with which it was associated at that time would, if the taxation year of the corporation and each of the corporations with which it was associated at that time for the purposes of computing their income under the federal Act and this Act had been the 12 month period ending August 31, 1982, have had Alberta crown royalty for that taxation year that would in aggregate exceed $5 333 333, or
(iii) is deemed to be an above-limit corporation by the Provincial Treasurer pursuant to subsection (1.3);
By casting such a very wide net in an attempt to exclude interests having a drilling date on or before August 24, 1982, the general scope of the Act would appear to include the same wide interests after that date under the general entitlement provisions contained in section 26.1 because all of such interests, whether held before or after August 24, 1982, fell within the general scope of the Act.
The plaintiff submits that the standard of review concerning the Provincial Treasurer's exercise of discretion can be found in certain cases interpreting sections of the Income Tax Act dealing with the exercise of a discretion by the Minister concerning expenses or allowances. In such cases the Minister's discretion has been held to be reviewable where it was not exercised legally or where relevant considerations are not taken into account. Even where the discretion can be exercised in a subjective manner, the person exercising the discretion remains under a number of constraints. First of all it is necessary to construe the Act in order to determine the policy and objectives of the legislation. Unlawful behaviour on the part of the person exercising the discretion can be constituted by outright refusal to consider the relevant matters, misdirecting himself on a point of law, taking into account some wholly irrelevant or extraneous consideration or by wholly omitting to take into account a relevant consideration. We are here referred to Pad field et al. v. The Minister of Agriculture, Fisheries and Food et al., [1968] A.C., 997 (H.L.(E.)) as well as Anisminic Ltd. v. Foreign Compensation Commission, [1969] 2 A.C., 147 (H.L.) and the list of jurisdictional errors found there although such list was held not to be exhaustive.
In the Secretary of State for Education and Science v. Thameside Metropolitan Borough Council, [1977] A.C., 1014 (H.L.(E.)) we are reminded of the following statement made by Lord Diplock at pages 1064 and 1065:
It was for the Secretary of State to decide that. It is not for any court of law to substitute its own opinion for his: but it is for a court of law to determine whether it has been established that in reaching his decision unfavourable to the council he had directed himself properly in law and had in consequence taken into consideration the matters which upon the true construction of the Act he ought to have considered and excluded from his consideration matters that were irrelevant to what he had to consider:
Counsel for the plaintiff here proposes that there were errors made in the direction letter which were fundamental and which minsconstrued the object and scope of the Act by linking royalty tax credits to additional activity resulting in the creation of more crown royalty. He argues that this misdirection constituted an error in law being an irrelevant consideration. Further it is stated on the plaintiff's behalf that the standard of normalcy attached to drilling activities is an unnecessary restriction on the scope of the Act, that is to say that only certain types of interests with certain characteristics attract royalty tax credits. He says that this also constituted misdirection, an irrelevant consideration and a misconstruction of the scope of the Act resulting in an error of law.
The suggestion that Dover Park's entitlement to royalty tax credits went to the benefit of Precambrian is said to be a preoccupation of the direction letter and the plaintiff's counsel contends that such was an irrelevant consideration and an error of law. It is argued that the transaction was a bona fide sale of property and not a transaction or sale that artificially increased any royalty tax credit that may be claimed just because royalty tax credit fell out of the transaction. Counsel for the plaintiff stresses that this is only incidental and that fact is that both Dover Park and Precambrian were obliged to pay crown royalty and accordingly have a claim for royalty tax credits pursuant to the Act.
Alternatively the plaintiff proposes that the discretion to be exercised by the Provincial Treasurer is not entirely subjective in nature because the discretion is modified by the words “artificially increase the royalty tax credit that may be claimed” (26.1(10)(b)). This introduces the concept of artificiality. The word “artificially” has received judicial consideration when interpreting section 245 of the Federal Income Tax Act (formerly s. 137(1)). The plaintiff points out that apart from paragraph 245(2)(b) of the federal Act, section 245 of the federal Act applies because it has been incorporated into the Act by subsection 13(1) of the Act. Subsection 245(1) of the federal Act is quoted as follows:
245(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 operation that, if allowed, would unduly or artificially reduce income.
Carrying on with the argument that the exercise of the Provincial Treasurer's discretion was not entirely subjective, the plaintiff said that the ordinary meaning of artificially is "not in accordance with normalcy, bizarre or contrived.” The court is asked to focus on the actual transaction between Precambrian and Dover Park. According to the direction letter itself, the transaction was not constituted as a sham. It is argued that none of the above definitions can apply to the transaction. It is further suggested that it is up to the court to define the word “artificially” because such word sets the parameters on the exercise of the discretion.
The case of Stubart Investments Ltd. v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305 (S.C.C.) is cited by the plaintiff as an example of the strict requirements laid down by the Supreme Court of Canada in order to find artificiality. There a business purpose test was applied to subsection 137(1) now 245(1) of the Income Tax Act. In that case Mr. Justice Estey said at page 316 (D.T.C. 6323):
Where the facts reveal no bona fide business purpose of the transaction, section 137 may be found to be applicable depending upon all the circumstances of the case. It has no application here.
In 1986 the definition of restricted resource property was amended to include any production properties sold by a restricted company (a company with royalties in excess of $4,000,000) after the amendment date. If the 1986 amendment had been included in the 1983 definition of restricted resource property there would have been no question as to its effect on the carve-out agreement entered into in 1985, that is to say once Precambrian had reached its limit then there would have been no question as to the effect of the restriction placed on the ability of a purchaser of a resource property to claim Royalty Tax Credit. Counsel for the plaintiff suggests that the defendant had the choice of including such a broad definition of restricted resource property in the 1983 amendments to the Act.
In Lloyds Bank Canada v. International Warranty Company Limited, [1989] 1 C.T.C. 401 a provision of the Income Tax Act was under consideration which purported to give the Minister priority over secured creditors. The Court of Appeal held that it was a presumption of construction in dealing with Acts which interfere with rights that the words should be plain and unambiguous in taking away or interfering with an existing right of a taxpayer. The court noted that an unproclaimed amendment in the Income Tax Act would have made the Crown's case impregnable. It was the Crown's statute and the Crown could have proclaimed the amendment but it did not. In the present case it is argued that the Provincial Treasurer has ascribed a scheme or interpretation concerning the scope of the Act as it was in 1985 in an attempt to invoke his opinion that a transaction was artificial in the absence of plain words to that effect. The plaintiff says that the specific restriction in the 1983 amendment to the Act belies such a wide interpretation because the 1986 wording was available to the Provincial Treasurer at the time of the 1983 amendments which only prohibited multiplication transactions on those properties which were drilled or had finished drilling on or before August 24, 1982. Multiplication of credit per se or transactions not outside the general scope of the Act were permissible prior to 1983. As a result of the 1983 amendments specific limited restrictions were brought into the Act in order to prevent such schemes. The 1986 amendments enlarged on the previous restrictions.
The plaintiff's final argument relates to the effectiveness of the exercise of the discretion by someone other than the person who heard the submissions from the oil and gas producers and other than the person who received the producer's written submissions. The direction was subject to the permission of the Assistant Deputy Treasurer for Revenue who was only given a draft direction letter to review. The Financial Administration Act permits the Provincial Treasurer to authorize employees of the department to do any act or thing required or permitted to be done by the Provincial Treasurer under the Act. The delegation of authority to the Director of Audits in respect of subsection 26.1(10) was subject to the restriction that he could not issue a direction letter without the permission of the Assistant Deputy Provincial Treasurer for Revenue, Mr. A.H. Kalke.
The plaintiff argues that Mr. Kalke ought to have been given the written submissions at least of Precambrian and the submissions made at the meeting held between the representatives of the department and Precambrian. Therefore it is contended that Mr. Kalke was not in a position to assess whether or not he should give permission to Mr. Calarco to issue the direction letter which exercised the discretion given to the Provincial Treasurer to deem the two companies to be associated for purposes of part 6 division 1 of the Act. In support of this proposition the plaintiff cites a Privy Council decision, James Edward Jeffs et al. v. New Zealand Dairy Production and Marketing Board et al., [1967] A.C. 551. In that case the board had referred a matter to a committee and the committee heard evidence and arguments and made a submission back to the board which adopted the recommendation of the committee without any further hearing and without consideration of any further submissions. There the board was held to have failed to discharge its duty to hear the interested parties before deciding on the zoning application.
Counsel for the plaintiff submits that a relevant portion of the letter written by Precambrian's solicitors to the Alberta Corporate Income Tax Administration Department was not set out in the direction letter although the opinion was dealt with in the reasons expressed in the direction letter. However it is felt that this was an inadequate consideration in that the actual submission was not passed on to the attention of the assistant deputy provincial treasurer, Mr. Kalke.
Defendant's Argument
The defendant defines the issue in this case to be whether the carve-out agreement is the type of sale or other transaction which artificially increases the Royalty Tax Credit in the opinion of the Provincial Treasurer and whether that opinion has been properly formed. The plaintiff says that this issue is not the same issue as when considering whether companies are associated under the federal income tax provisions which deal with common control and cross ownership because here Dover Park and Precambrian are entirely different corporations. Royalty Tax Credit is a discreet system and the words "associated corporations" used in the Act are there for a different purpose. The refundable tax credit is essentially a grant or subsidy delivered through the tax system out of the Heritage Trust Fund which takes this case outside of the usual income tax cases.
The defendant points out that the plaintiff's appeal under the Act is from an assessment and not from the direction letter which deemed the two companies to be associated and thereby limited both companies to one maximum allowable credit for each year to be allocated between each of them. This shifts the emphasis away from the usual tax cases relating to methods of assessment to the law relating to the exercise of a ministerial discretion where the role of the court in reviewing the transaction is concerned only with a review of the direction limited to what the statute says. An appeal from an assessment is an appeal from the amount and not an appeal from the method by which the assessment is arrived at and here the direction was not part of the assessment. The defendant argues that the ministerial discretion must be determined before the assessment operation can be performed and that the court cannot interfere with the Minister's discretion when such discretion is the means through which legislative policy is implemented. The court can only step in where there has been an improper exercise of a discretion but the court cannot substitute its own opinion for that of the Minister. In other words judicial deference is required. It is pointed out by the defendant that the Act does not say that the Provincial Treasurer's opinion must be reasonable.
The plaintiff's main argument that irrelevant facts and principles were considered by Alberta Treasury and that the direction was issued without the consideration of certain relevant facts and principles is countered by the defendant's assertion that the plaintiff has failed to satisfy the onus on it to prove that the Provincial Treasurer or those persons authorized to act on his behalf, failed to exercise his discretion properly or in a manner which would invite intervention by the Court.
The defendant contends that all of the allegations made by the plaintiff in the notice of objection and in particular paragraph 10 of the notice of objection as expanded by the statement of particulars, must be proved by the plaintiff, that is to say the onus is on the plaintiff to prove its case. In support of this contention, the defendant refers to a 1948 decision of the Supreme Court of Canada, Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195 at page 199 (S.C.R. 489):
Notwithstanding that it is spoken of in section 63(2) as an action ready for trial or hearing, the proceedings is an appeal from the taxation; and since the taxation is on the basis of certain facts and certain provisions of law, either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be excluded as it was dealt with by these persons unless questioned by the appellant.
The defendant also quotes from M.N.R. v. Wrights' Canadian Ropes, Limited, [1947] C.T.C. 1; 2 D.T.C. 927; [1947] A.C. 109 a decision of the Privy Council on appeal from the Supreme Court of Canada at pages 13-14 (D.T.C. 931; A.C. 122) as follows:
. . . This right of appeal must, in their lordships' opinion, have been intended by the legislature to be an effective right. This involves the consequence that the Court is entitled to examine the determinaton of the Minister and is not necessarily to be bound to accept his decision. Nevertheless, the limits within which the Court is entitled to interfere are in their lordships' opinion strictly circumscribed. It is for the taxpayer to show that there is ground for interference and if he fails to do so the decision of the Minister must stand. Moreover, unless it be shown that the Minister has acted in contravention of some principle of law the Court, in their
lordships' opinion, cannot interfere: the section makes the Minister the sole judge of the fact of reasonableness or normalcy and the Court is not at liberty to substitute its own opinion for his. . . .
The defendant also cites Associated Provincial Picture Houses, Limited v. Wednesbury Corporation, [1948] 1 K.B. 223 at page 228 for the proposition that it is for those who assert that the local authority has contravened the law to establish that proposition. That case also contains a useful discussion concerning the power of the courts to interfere with an act of executive authority.
The plaintiff has conceded that it is not pursuing the suggestion that the Provincial Treasurer could not delegate his authority to exercise the discretion given to him under the Act to direct that two companies may be deemed to be associated for the purposes of part 6 division 1 of the Act. The Financial Administration Act and the ministerial authorizations passed pursuant to that Act clearly permit the Treasury Department employees named in the ministerial authorizations, including Mr. Calarco as Director, Audits, to do any act or thing required or permitted to be done by the Provincial Treasurer under certain designated sections of the Act including subsection 26.1(10). As to the argument that the decision was in fact made by Mr. Kalke, the Assistant Deputy Provincial Treasurer, Revenue and not by Mr. Calarco, Director, Audits and that Mr. Kalke was not furnished with appropriate material upon which to base the exercise of a discretion, the defendant argues that the decision was in fact made by Mr. Calarco, the person who was in charge of the investigation conducted by the Treasury Department and who was present when all submissions were made and who reviewed all of the material presented by or on behalf of the plaintiff.
I accept the defendant's submission in this regard and if I had any doubts, which I do not, as to whether or not it was Mr. Calarco’s decision, such doubts are put to rest as a result of the memorandum written by Mr. Kalke to Mr. Calarco on October 30, 1986 where Mr. Calarco states:
I understand that you are proposing to exercise the discretion of the Provincial Treasurer under section 26.1(10) of the Alberta Corporate Income Tax Act to direct these corporations to be deemed to be associated with each other for royalty tax purposes for the 1985 taxation year.
Clearly it was Mr. Calarco exercising the discretion, as he was authorized to do and not Mr. Kalke. I do not find it necessary to review the cases in support of the proposition that the person making the decision must hear the submissions and the counter proposals because in this case I am satisfied that Mr. Calarco, the decision maker, was in possession of all of the facts and heard all of the relevant submissions which were made by or on behalf of the plaintiff. Likewise I reject the plaintiff's complaint that Mr. Kalke should have reviewed the plaintiff's solicitor's initial letter of objection where such letter was reviewed by Mr. Calarco and mentioned in the direction letter as part of the representations made by the vendor (Precambrian).
The defendant says that it is necessary to look at the substance of the transaction in order to understand how the Provincial Treasurer came to the opinion that the transaction artificially increased the Royalty Tax Credit claimed by Precambrian. When reference is made to Provincial Treasurer I am really talking about Mr. Calarco who exercised the Provincial Treasurer's discretion in the direction letter signed by Mr. Calarco as Director, Audits. The defendant says that the Provincial Treasurer considered the carve-out agreement from a business and practical point of view to be some kind of financing transaction economically equivalent to a loan and quite different from an outright sale of properties. He came to this conclusion as a result of a consideration of various factors. The defendant says that Dover Park had really no role in the transaction at all other than to sell its tax losses and that Dover Park received a non- recourse loan secured by the assets purchased by it from Precambrian where Dover Park kept a percentage income amount (a payment of 15 per cent of its tax losses) and all of the rest of the production income went to amortize the loan. In essence the defendant says the real relationship was between Precambrian and its bank, the same bank which lent the money to Dover Park.
Other factors considered by the Provincial Treasurer were summarized by the defendant as follows. Firstly the financing effect. The defendant says that this was supported by the evidence of the witnesses Renner and Wilson who acknowledged that the arrangement was really a borrowing plus a purchase of tax losses and that the terminating interest sold to Dover Park would not have been sold outright. The disclosures in the annual report and in the evaluation made for management used loan terminology in order to explain the transaction. The defendants submits [sic] that this is consistent with the Provincial Treasurer's view of the business purpose and the business effect of the transaction which justified the invocation of the discretion. In all of the calculations Royalty Tax Credit was a very significant contribution to the transaction. As originally constituted Royalty Tax Credit formed approximately one-third of the total benefit flowing back to Precambrian which meant that the retirement of the moneys advanced by Dover Park to Precambrian was to be financially assisted by Alberta Royalty Tax Credit to the extent of approximately one-third. I do not accept the statements made by Messrs. Renner and Wilson which downgraded the significance of Royalty Tax Credits.
The defendant argues that there was really no shifting of risk to Dover Park which would normally be the case in the event of an outright sale to a purchaser. The defendant contends that the witnesses called for Precambrian support this view despite the apparent reluctance of the Continental Bank which was approached to lend the money to Dover Park in the first instance.
In looking at the role Royalty Tax Credit played in the carve-out transaction, the defendant says that there is no suggestion that the underlying purpose of the transaction was to increase Royalty Tax Credit and that it is not pursuing the test set out in paragraph 26.1 (10)(a) of the Act. The defendant therefore concedes that there was a business purpose for the transaction other than increasing Royalty Tax Credit. Precambrian was interested in securing moneys in return for a sale of a terminating interest of some of its producing properties which meant that it was giving up production income for a period of time, thereby reducing its taxable income and Dover Park was securing some cash flow resulting from the sale of a percentage of its tax losses to Precambrian. However the defendant says that what is relevant is the identification of the party who in fact got the benefit of the Royalty Tax Credit and that in this instance the economic benefit flowed directly to Precambrian. The evaluation of the carve-out deal prepared for the management of Precambrian and submitted in evidence shows Alberta Royalty Tax Credit as a part of the total benefit flowing from Dover Park to Precambrian. Precambrian was also aware of the risk that such benefits might not be available to it. Its concern was clearly demonstrated through its exchange of correspondence with its accountants and the lack of assurances that were forthcoming.
In Precambrian's annual report for 1985, entered in evidence, the producing properties transferred to Dover Park were still treated as part of Precambrian's operations. Reference was made in the annual report to a deferred production arrangement. Production from the property "sold" to Dover Park was still shown as Precambrian’s net of royalties. Royalty Tax Credit payable to Dover Park was shown as a reduction in deferred revenue and accordingly reduced the liability of Precambrian. Therefore, the defendant submits, Royalty Tax Credit received by Dover Park is shown as belonging to Precambrian.
The defendant argues that the Provincial Treasurer was entitled to look to the income tax motivation of the plaintiff when entering into the carve-out transaction in order to determine the substance of the transaction. The defendant says that income tax savings were a paramount factor to the parties. In so far as Dover Park was considered that was essentially the whole deal. For Precambrian it was a paramount consideration other than the primary consideration which was to raise money. The defendant suggests that by itself the tax motivation does not run afoul of subsection 26.1(10) but it helps to understand what the business purpose and effect of the transaction was and in that sense is relevant to the exercise of the Provincial Treasurer's discretion.
The last factor examined by the defendant was the fact that the common use of carve-out agreements suggests that they are neither abnormal or unusual at least until July of 1985 when the income tax benefits were removed. The defendant says that the fact the transaction may have been in common use does not prove a great deal when looking at the substance of the transaction.
In advancing his legal arguments, counsel for the defendant discussed the role of the court in reviewing the carve-out transaction and the exercise of the minister's discretion. He stresses that this is an appeal from the assessment rather than from the direction letter and that the appeal, being a statutory right is therefore limited to what the statute says. The case of Okalta Oils Limited v. M.N.R., [1955] S.C.R. 824; [1955] C.T.C. 271; 55 D.T.C. 1176 at page 273 (D.T.C. 1176; S.C.R. 825) is cited for the proposition that the word "assessment" found in subsection 69a and 69b of the Income War Tax Act R.S.C.1927, c. 97 means the actual amount of tax which the taxpayer is called upon to pay by the decision of the Minister and not the method by which the assessed tax is arrived at. The defendant says that the direction was not part of the assessment in this case.
In Pure Spring Company Limited v. M.N.R., [1946] Ex. C.R. 471; [1946] C.T.C. 169; 2 D.T.C. 844, President Thorson is quoted at pages 196-97 (D.T.C. 856; Ex. C.R. 498) where he discusses the difference between the Minister's discretionary determination under subsection 6(2) of the Income Tax War Act and the assessment levied by him under the powers conferred by part 7, particularly section 55. There Thorson, P. said:
. . . The two operations are quite separate and distinct in point of time and scope of substance and the Minister’s functions in respect of them are fundamentally different in character. The Minister’s discretionary determination must be made before the assessment operation can be performed. It is, of necessity, antecedent in point of time, for the amount of excessive expense to be disallowed in the assessment cannot be taken into account in the computations involved in it, until after such amount has been determined by the Minister under his statutory power. The amount so determined is only one of many items entering into the assessment.
and at page 197 (D.T.C. 857; Ex C.R. 499):
. . . The two functions also differ fundamentally in character. In so far as the Minister's determination may involve duties of a quasi-judicial nature such as, for example, giving the taxpayer an opportunity to make his representations, he must perform them. In the assessment operation, on the other hand, there are no quasi- judicial duties of any kind to be performed. The operation is solely administrative. There is an even more vital difference. The determination involves the exercise of a discretion of a policy nature, that is legislative in effect. When that function is finished, all that the Minister need consider in respect of this item, when he comes to the assessment operation, is the amount of his statutory determination. The assessment operation is quite different; no exercise of discretion is involved. . . .
The defendant contends that there is an appeal from the assessment but not from the direction but that the court still has a power to review the exercise of the discretion.
The defendant refers again to Wrights’ Canadian Ropes, supra, in defining the role of the court and the standard of deference to be employed by the court involving the exercise of ministerial discretion. The defendant quotes from pages 13-14 (D.T.C. 927; A.C. 122) of the report as follows:
. . . This right of appeal must, in their Lordships' opinion, have been intended by the legislature to be an effective right. This involves the consequence that the court is entitled to examine the determination of the Minister and is not necessarily to be bound to accept his decision. Nevertheless, the limits within which the court is entitled to interfere are, in their Lordships' opinion, strictly circumscribed. It is for the taxpayer to show that there is ground for interference, and if he fails to do so the decision of the Minister must stand. Moreover, unless it be shown that the Minister has acted in contravention of some principle of law the court, in their Lordships' opinion, cannot interfere: the section makes the Minister the sole judge of the fact of reasonableness or normalcy and the court is not at liberty to substitute its own opinion for his.
The defendant also quotes from Pioneer Laundry and Dry Cleaning Ltd. v. M.N.R., [1939] S.C.R. 1; [1938-39] C.T.C. 411; 1 D.T.C. 499-69; rev'd [1940] A.C. 127; 2 D.T.C. 595 (P.C.) and in particular pages 416-17 (D.T.C. 499-71 to 499-72; A.C. 136) of the Privy Council decision where their Lordships agreed with the opinion [of] Davis, J. in which he states:
. . . The appellant was entitled to an exemption or deduction in “such reasonable amount as the Minister, in his discretion, may allow for depreciation.” That involved, in my opinion, an administrative duty of a quasi-judicial character—a discretion to be exercised on proper legal principles.
In their Lordships' opinion, the taxpayer has a statutory right to an allowance in respect of depreciation during the accounting year on which the assessment in dispute is based. The Minister has a duty to fix a reasonable amount in respect of that allowance and, so far from the decision of the Minister being purely administrative and final, a right of appeal is conferred on a dissatisfied taxpayer; but it is equally clear that the Court would not interfere with the decision, unless—as Davis J. states—"it was manifestly against sound and fundamental principles.”
On the basis of the foregoing the defendant says that the court is not to place itself in the position of the Provincial Treasurer and rehear the evidence and re-exercise the discretion given to the Minister in the Act. The defendant says that the court's role is judicial review and not the right of appeal from the exercise of the discretion by the Minister. Again the Pure Spring case, supra, is quoted at pages 487 and 494 and Nicholson Limited v. M.N.R., [1945] Ex. C.R. 191 at page 205; [1945] C.T.C. 263; [1945] 4 D.L.R. 63. The defendant says that the court's role in the judicial review of the exercise of ministerial discretion is one of deference and cites the Supreme Court of Canada case Oakwood Development Ltd. v. Rural Municipality of St. François Xavier, [1985] 2 S.C.R. 164 at pages 173 and 174; 20 D.L.R. (4th) 641 at 648:
. . . the general rule regarding interference with the discretionary decisions made by administrative bodies acting under statutory authority has been one of deference. Lord Halsbury stated in Westminster Corporation v. London and North Western Railway Co., [1905] A.C. 426, at p. 427:
Assuming the thing done to be within the discretion of the local authority, no Court has power to interfere with the mode in which it has exercised it. Where the Legislature has confided the power to a particular body, with a discretion how it is to be used, it is beyond the power of any Court to contest that discretion. Of course, this assumes that the thing done is the thing which the Legislature has authorized. . . .
More recently, and dealing specifically with applications for subdivision, the Supreme Court of Canada in City of Vancouver v. Simpson, supra, at p. 76, approved the following statement of Kirke Smith J. in the Court below:
Where, as here, there is direct statutory foundation for the ground given for the decision to approve or disapprove, and where it is not shown that that decision, despite its impact on an individual, was made in bad faith, or with the intention of discriminating against that individual, or on a specious or totally inadequate factual basis, there should, in my opinion, be no interference by the court with municipal officials honestly endeavouring to comply with the duties imposed on them by the Legislature in planning the coherent and logical development of their areas.
In his review of whether the Minister took irrelevant consideration into account or failed to take relevant considerations into account when forming his decision, counsel for the defendant submits that this concept does not mean an examination of the facts, but only the basic factors which influenced the Minister’s decision. These factors come out of the statute which is to be consulted to see whether or not the considerations are relevant or irrelevant. That is to say in this case whether the carve-out transaction artificially increased the Royalty Tax Credit. Beyond the statutory criteria the court may consider whether or not the Provincial Treasurer failed to turn his mind to all of the relevant factors or took irrelevant factors into consideration. Here the standards are very high and we are not concerned with trivial matters or clearly extraneous matters. They must be all highly relevant matters. The defendant also says the courts are not concerned with the weight to be attached to the various factors. That is within the Minister's own discretion. Here the defendant quotes from Elliot and Others v. London Borough of Southwark, [1976] 2 All E.R. 781 (C.A.) at page 788.
. . It is not for the court to prescribe a list of matters which must always be considered or to prescribe which factors should be given more weight than others. It is worth repeating that the function of the court, where such issues are raised, is not to substitute its own opinion or decision on matters which Parliament has left to the judgment of the local authority but to decide whether the local authority in reaching its decision has acted in accordance with the statutory provisions.
The defendant contends that it is not sufficient for the plaintiff to demonstrate that some kind of irrelevant factors may have been taken into account. Such factors must have had a substantial influence on the Minister's decision. We are referred to a case of the appellant division of the Alberta Supreme
Court, Re United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada, Local 488 and Reynolds et al., [1976] 3 W.W.R. 303 at page 323; 69 D.L.R. (3d) 74 at 92 where Moir, J.A. quotes from S.A. de Smith in Judicial Review of Administrative Action, 3rd ed. (1973), page 297 as follows:
. It is immaterial that an authority may have considered irrelevant matters in arriving at its decision if it has not allowed itself to be influenced by those matters. . . .
In applying the above principles the defendant says that the Provincial Treasurer took a number of considerations into account in reaching his opinion that the carve-out transaction artificially increased the Royalty Tax Credits claimed by Precambrian and that such considerations were relevant and reasonable. Such considerations are apparent from an examination of the direction letter (that portion already quoted) where the Provincial Treasurer considered the business or economic purpose and result of the transaction versus the legal result that is a loan transaction taking advantage of the tax losses and Royalty Tax Credit versus a sale of an oil and gas interest and also his consideration of who bore the economic cost of Royalty Tax Credit and who reaped the economic benefit of any additional Royalty Tax Credit. This information came from the disclosures made by the management of Precambrian and Dover Park, the financial statements, the terms of the carve-out agreement itself, a consideration of the risks undertaken by Dover Park, the importance of Royalty Tax Credit in the financing scheme, the purchase of tax losses from Dover Park and the flow of the Royalty Tax Credit benefit to Precambrian. All of the above matters were reasonably considered and relevant having regard to the policy of the Act which was to prevent multiplication of tax credits.
The plaintiff's argument that the public trustee linked the availability of Royalty Tax Credit to business activity is countered by the defendant who submits that such was not an error at all but resulted from the plaintiff's misunderstanding of the text of the direction and the plaintiff's misapplication of the principles of law relating to relevant and irrelevant considerations. As to the distinction made by the Provincial Treasurer between the carve-out transaction and a normal commercial sale, the defendant says if the Provincial Treasurer cannot distinguish between sales resulting in Royalty Tax Credits or no Royalty Tax Credits, then what is the purpose of subsection 26.1(10) which refers to “sales” which artificially increase credit. Such a consideration can hardly be held to be an irrelevant issue. Some sales do not artificially increase credits but the Provincial Treasurer must look at the sale to determine into which category the sale fits.
In opposition to the plaintiff's argument that the Provincial Treasurer misinterpreted the word “artificially” the defendant says that the real issue has nothing to do with the meaning of that word. The issue concerns how the Provincial Treasurer applied the word to the facts and that is where his discretion lies. The Provincial Treasurer has only to use a meaning which the word can reasonably bear and that is the ordinary meaning of the word in the ordinary usage of the English language as opposed to a narrow judicial interpretation of the word. Here the defendant quotes from Brutus v. Cozens, [1973] A.C. 854 (H.L.(E.)) at page 861 as follows:
. . . The meaning of an ordinary word of the English language is not a question of law. The proper construction of a statute is a question of law. If the context shows that a word is used in an unusual sense the court will determine in other words what that unusual sense is. But here there is in my opinion no question of the word “insulting” being used in any unusual sense. It appears to me, for reasons which I shall give later, to be intended to have its ordinary meaning. It is for the tribunal which decides the case to consider, not as law but as fact, whether in the whole circumstances the words of the statute do or do not as a matter of ordinary usage of the English language cover or apply to the facts which have been proved. If it is alleged that the tribunal has reached a wrong decision then there can be a question of law but only of a limited character. The question would normally be whether their decision was unreasonable in the sense that no tribunal acquainted with the ordinary use of language could reasonably reach that decision.
The defendant also refers to Transalta Utilities Corporation v. Public Utilities Board (1960), 21 Admin. L.R. 1 (Alta. C.A.) at page 11 where Kerans, J.A. held:
. . . Sometimes a Legislature invites limited review not by purporting to limit the power of the reviewing Court but rather by conferring delegated legislative powers on the tribunal. When the delegation is manifest, as when the tribunal is empowered to “make regulations”, the matter is beyond dispute. In other cases, the delegation is not so obvious but is found in the description of the powers of a tribunal in terms which are at once imprecise and evocative. The use of elastic adjectives is usually considered by a Court as an implicit granting of a power to the tribunal to form its own “opinion” or make “policy” or to exercise a "discretion"— in fine, to make law. The key power of this board is to fix “fair and reasonable” rates. This is a good example of a grant of wide discretion.
The defendant also cites TransMountain Pipe Line Co. Ltd. v. National Energy Board, [1979] 2 F.C. 118 (F.C.A.) at page 121 as follows:
Whether or not tolls are just and reasonable is clearly a question of opinion which, under the Act, must be answered by the Board and not by the Court. The meaning of the words “just and reasonable” in section 52 is obviously a question of law, but that question is very easily resolved since those words are not used in any special technical sense and cannot be said to be obscure and need interpretation. What makes difficulty is the method to be used by the Board and the factors to be considered by it in assessing the justness and reasonableness of tolls. The statute is silent on these questions. In my view, they must be left to the discretion of the Board which possesses in that field an expertise that judges do not normally have. If, as it has clearly done in this case, the Board addresses its mind to the right question, namely, the justness and reasonableness of the tolls, and does not base its decision on clearly irrelevant considerations, it does not commit an error of law merely because it assesses the justness and reasonableness of the tolls in a manner different from that which the Court would have adopted.
In the present instance the defendant says that the Provincial Treasurer has given the word artificially a meaning that such word can reasonably bear and the question to be answered is the application of the word to the facts found by him.
The defendant points out that the use of section 245 of the Federal Income Tax Act in interpreting subsection 26.1(10) concerning the use of the word artificially cannot help the plaintiff. In Don Fell Limited, et al. v. The Queen, [1981] C.T.C. 363; 81 D.T.C. 5282 (F.C.T.D.) Justice Cattanach held at page 375 (D.T.C. 5291-92):
But, in my view, subsection 137(1) and subsection 245(1) are directed not only to sham transactions but to something less as well where the expense, although real, would unduly or artificially reduce a taxpayer's income.
In Seramco Ltd Superannuation Fund Trustees v. ITC, [1976] 2 All ER 28, Lord Diplock said at 35:
"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. . . .
He added that it is not synonymous with “fictitious” and he went on to say:
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. . . .
That being so and bearing Lord Diplock’s admonition in mind consideration must be directed to how the bonus arrangement came into being, all circumstances surrounding how it came into effect, if it was carried out and if it was not, the circumstances why it was not carried out all in order to see if the particular transactions under review are properly described as “artificially” reducing income within the meaning of those words as used in the subsections.
Standard dictionaries are not authoritative as to the meaning of a word used in the context of a Statute but where that word is an ordinary English word used in that sense resort may be had to those works to ascertain the popular meaning of the word.
The word "unduly" relates to quantum and means "excessively" or "unreasonably" and “artificially” means "not in accordance with normality”.
As to the effect of the 1986 amendments, the defendant says subsection 26.1(10) was in the statute at all relevant times and therefore the 1986 amendments cannot be used in support of an inference that the Act was deficient in 1985 to prevent the Provincial Treasurer from exercising his discretion to deem the two companies to be associated. Section 33 of the Interpretation Act R.S.A. 1980 c. 1-7 is offered by the defendant as authority for the propostion that subsequent statutory amendments are not normally used to interpret a prior statute. Subsection 33(2) provides as follows:
The amendment of an enactment shall not be construed to be or to involve a declaration that the law under the enactment prior to the amendment was or was considered by the Legislature or other body or person by whom the enactment was enacted to have been different from the law as it is under the enactment as amended.
Finally the defendant argues that Alberta and Southern Gas Co. Ltd. v. The Queen, [1977] 1 F.C. 395; [1978] C.T.C. 780; 78 D.T.C. 6566 (F.C.T.D.) has no application to the present case regarding any potential error of law made by the Minister in exercising his statutory discretion. In the Alberta and Southern case both parties to a carve-out agreement were in the petroleum business and the carve-out permitted the purchaser to take production in kind. The reasoning in the Federal Court of Appeal affirmed by the Supreme Court of Canada was specific to the statutory scheme under the Income Tax Act. There the purchaser was entitled to certain deductions under the Income Tax Act referred to as Canadian oil and gas property expenses. This was a statutory exemption to promote the type of expenditure made by the purchaser. Section 245 of the Income Tax Act was held to be inappropriately applied as a general anti-avoidance rule to stop the allowance of such an expenditure. The defendant says that the court in the Alberta and Southern case had to find that the general anti-avoidance rule under section 245 was sufficient to override the specific incentive deduction found elsewhere in the Income Tax Act. In the case before us just the reverse is true where subsection 26.1(10) specifically and exclusively deals with Royalty Tax Credits being its only function. Where Royalty Tax Credit is the incentive with a maximum allowable limit, subsection 26.1(10) is there to preserve that maximum allowable limit and to protect the integrity of the Royalty Tax Credit system. The defendant points out that section 245 is not discretionary, it is just another tax rule whereas subsection 26.1(10) is discretionary and therefore the role of the Provincial Treasurer is completely different than as if he were applying a non-discretionary income tax provision. Further the defendant says that the Alberta and Southern case does not hold that the carve-out agreement there was not artificial. That case holds that one result of the carve-out transaction, the deduction allowed to the purchaser for the cost of acquiring properties, does not artificially decrease income. Here we are considering a different result of a carve-out that is an unusual result unlike deductions allowed to a purchaser which is a necessary result of all carve-outs.
Furthermore the defendant says that section 245 of the Income Tax Act does not refer to a sale, just to a "transaction or operation". Subsection 26.1(10) of the Act does refer to a sale and therefore the Provincial Treasurer must examine sale transactions to determine if such a transaction artificially increases the Royalty Tax Credit. The defendant submits that unlike the case in section 245, there have to be two or more corporations involved when the Minister considers whether there has been a multiplication in Royalty Tax Credits as a result of artificial increases in the Royalty Tax Credits. The defendant concludes that the Provincial Treasurer made it clear in his direction letter that he considered the Alberta and Southern case and considered it not to be binding on his decision.
Decision
There is no doubt that without the exercise by the Minister of his discretion to deem the two companies to be associated with each other for the purpose of calculating their entitlement to Alberta Royalty Tax Credit, both Dover Park and Precambrian would have been entitled to receive Alberta Royalty Tax Credits totalling in the aggregate an amount in excess of the maximum allowable credit of two million dollars. Each company was in receipt of production income on which crown royalties were payable and which royalties were not allowed to be used as a deduction from income under the provisions of the Federal Income Tax Act. The carve-out agreement was entered into for legitimate business purposes on the part of each company. Precambrian, for the purpose of raising capital to meet anticipated expenditures, and Dover Park to recapture a portion of its previous tax losses. The defendant has conceded that paragraph 26.1(10)(a) does not apply where the sale or transaction lacks any substantial business purpose other than increasing the aggregate amount of Royalty Tax Credit that may be claimed. However paragraph (b) does not limit the Provincial Treasurer from exercising his discretion to deem two companies to be associated where the effect of the sale or transaction is limited only to an artificial increase in the Royalty Tax Credit that may be claimed. There may be business purposes beyond any increase in Royalty Tax Credit and the Minister is still able to invoke his discretion in the event he is of the opinion that the sale or transaction also artificially increases the Royalty Tax Credit notwithstanding any accompanying business purpose for the transaction. Hence any discussion concerning the legitimate business purposes for the sale or transaction becomes superfluous once the Provincial Treasurer has formed the opinion that the sale or transaction artificially increases the Royalty Tax Credit.
I agree that it is necessary to review the Act in order to determine the policy and objectives of the legislation. This presents no great difficulty in the present instance. The Provincial Legislature wished to relieve certain oil and gas producers from the adverse effects of having Alberta crown royalties disallowed as a deduction from income when calculating federal income tax. A credit was to be allowed to such producers on crown royalties payable by them up to certain prescribed limits in each year. In order to provide against a multiplication of credits beyond the maximum allowable credit, certain safeguards had to be built into the Act including the provision deeming corporations to be associated and therefore entitled to receive only one maximum allowable credit to be shared or allocated between them. The Act does not distinguish between types of interests sold nor the permanency of sales nor does it require an increase in crown royalties as a result of such sales or transactions in setting guidelines covering the application of the anti-multiplication provisions of the Act. The discretion as to whether corporations shall be deemed to be associated lies entirely with the Minister. In order to entertain the opinion that there has been an artificial increase in Royalty Tax Credits, the Minister must take as many relevant factors into consideration as the circumstances of the transaction open to him. If a sale or transaction results in greater drilling activity which in turn produces greater resulting crown royalties, I can hardly think that that would not be a factor in the Minister deciding that such a sale or transaction did not artificially increase Royalty Tax Credits. The factors mentioned by the defendant in its argument which assist in the determination of the substance and effect of the carve-out agreement as well as the comparables mentioned in the Minister's opinion do not appear to me to be irrelevant considerations. Such comparables as normal commercial transactions, additional business activity which creates additional crown royalty, sold outright, economic risks and a lasting business enterprise were of obvious concern to the Minister in reaching a conclusion as to whether or not the carve-out agreement had the effect, even amongst other consequences, of artificially increasing Royalty Tax Credit.
The cases quoted by both the plaintiff and the defendant pursuade me that in the circumstances of this case, the Minister did not take into account any irrelevant factors nor did he fail to take into account any relevant considerations when he examined the substance of the carve-out agreement and concluded that "one result of the carve-out transaction was to synthesize an abnormal or artificial amount of Royalty Tax Credit".
The Provincial Treasurer had the task of determining whether the carve-out agreement could stand the test between what he, in his opinion, considered would artificially increase Alberta Royalty Tax Credits and what would not in order to carry out the legislative objectives of the Act. The discretion was his alone to exercise as well as the weight to be attached to each factor. The cases cited by the defendant concerning the exercise of ministerial or administrative discretion do not permit the court to interfere with the exercise of such discretion where, as here, a review of the Minister’s actions does not disclose anything unfairly, improperly or illegally done by the Minister. Judicial deference is required in this case.
I accept the defendant's argument concerning the Minister's use of the word “artificial”. I find from reading the Minister's opinion set out in the direction letter that the Minister used a meaning which the word can be [sic] reasonably bear and that is the ordinary meaning of the word in the ordinary usage of the English language. Without the intervention of the carve-out agreement, Precambrian would only have been entitled to the benefit of the maximum allowable amount of Royalty Tax Credits. The carve-out agreement provided an ingenious strategy by which additional Royalty Tax Credits accrued to the benefit of Precambrian. It is not stretching the meaning of the word artificial used in its ordinary sense for the Minister to form the opinion that in these circumstances the carve-out transaction artificially increased the Royalty Tax Credit claimed by Precambrian. Nor is the fact that Dover Park's entitlement to Alberta Royalty Tax Credits accrued to the benefit of Precambrian an irrelevant consideration and therefore an error of law. Such a result was relevant in determining whether such an arrangement artificially increased Royalty Tax Credit. Precambrian's own witnesses acknowledged that the carve-out agreement pushed Royalty Tax Credits claimed by Dover Park and Precambrian and flowing to the sole benefit of Precambrian beyond the two million dollar maximum allowable credit in 1985 and 1986. Surely it is not irrelevant for the Provincial Treasurer to look through the transaction in order to determine what in fact was the effective result of the transaction. What the Provincial Treasurer found here was a sophisticated scheme designed to raise capital at the lowest possible cost taking advantage of the Alberta Royalty Tax Credit incentive program where the benefits of the program were not retained by an active participant in the oil and gas industry but passed on to a company about to reach the upper limit of its Royalty Tax Credits. The initial recipient of the Royalty Tax Credits was nothing more than a conduit through which the tax credits passed in return for a nominal payment for its otherwise unutilized tax losses.
I find that 1986 amendments [sic] to the Act have no bearing on the interpretation of the Act as it was in 1985. Not only were the anti-multiplication provisions set out in subsection 26.1(10) of the Act available to the Minister in 1985 but having regard to subsection 33(2) of the Interpretation Act, supra, I do not believe that it is possible for me to take such amendments [sic] into consideration when interpreting the Act as it stood in 1985.
The reference to the Alberta and Southern case, supra, was an interesting analogy because that case and this case both dealt with carve-out agreements. However, for the reasons advanced by the defendant, I find that the Alberta and Southern case has no application here.
The onus was on the plaintiff to prove that the direction by the Minister that Precambrian and Dover Park are deemed to be associated corporations for the purpose of claiming Alberta Royalty Tax Credits was in error. The plaintiff has not discharged that onus and accordingly the plaintiff's appeal is dismissed.
Costs may be spoken to if required.
Appeal dismissed.
EXHIBIT “A”
Conveyance and Management Agreement
The basic concept behind the conveyance and management agreement is that when the net proceeds (which was a running cumulative amount) caught up to the termination amount (which was a running cumulative amount) then the term interest would terminate.
The termination amount meant, at any point in time, the aggregate of:
(i) the purchase price = $14,000,000, plus
(ii) the designated amount pegged at the end of the calendar month immediately prior to the particular time, plus
(iii) the percentage income amount pegged at the end of the calendar month immediately prior to the particular time, minus
(iv) the option price $75,000
The designated amount was a cumulative amount calculated at the end of each month equal to:
1. Prime + 3/4% X (i) $14,000,000, plus 12 (ii) the designated amount (at the previous month end), plus (iii) the precentage income amount (at the previous month end), minus (iv) net cash proceeds (at the start of the month) plus 2. The cumulative designated amount at the end of the immediately prior calendar month.
The designated amount was deemed to be nil at April 30, 1985 and deemed to be $71,000 at May 31, 1985.
The percentage income amount was a cumulative amount determined at the end of a month equal to the aggregate of a series of monthly calculated amounts including a calculation for that month. Each of these series of monthly amounts equalled 15 per cent of the notional taxable income of the purchaser for that month calculated as if the month was a tax year and the purchaser's only source of income was production from the assets.
The notional taxable income was calculated on the basis that the purchaser deducted each month the deductible expenses for the month attributable to the production from the assets including a deemed expense equal to the amount to be added to the designated amount for the month and certain tax deductions such as the resources allowance.
The termination point meant the the earliest of:
(i) 12:01 a.m. on the day immediately following the day, if ever, net proceeds first equalled or exceeded the termination amount;
(ii) 12:01 a.m. on the day immediately preceding the day on which all the leases terminated; and
(iii) 12:01 a.m. on May 1, 2005.
For the purposes of calculating the termination point, net proceeds meant a cumulative amount equal to the aggregate of:
(i) proceeds received by the purchaser for production (other than injection gas) on the basis that such proceeds were receivable on delivery to a purchaser; plus
(ii) government incentives and grants (other than ARTC and reductions of Crown royalty); plus
(iii) proceeds of business interruption insurance relating to the assets; plus
(iv) take-or-pay or similar prepayments received in respect of the assets;
less the aggregate of:
(v) Alberta Crown royalty net of any ARTC attributable thereto (and net of any other reductions to such Crown royalty); p/us
(vi) operating costs; p/us
(vii) PGRT net of any PGRT tax credits; plus
(viii) intangible development costs; plus
(ix) other taxes, royalties and charges (net of credits) levied by government but not income tax or capital tax); plus
(x) other costs and expense charged to the purchaser by Precambrian as manager of the assets.
It should be noted that in calculating the designated amount, net cash proceeds is used rather than net proceeds. Net cash proceeds is, generally, net proceeds converted to some extent to a cash receipt basis from an accrual basis.
Examples
Month 7—ending May 31, 1985
Net Proceeds Net Cash Proceeds
Proceeds $125,000 $0
Crown royalties ($ 30,000) ($30,000) ARTC $ 15,000 $15,000 Operating costs ($ 15,000) ($15,000) PGRT (net of credit) ($ 2,500) ($ 2,500) Net proceeds $92,500 ($32,500)
Designated Amount = $71,000 (deemed amount)
Percentage Income Amount
Proceeds $125,000 Operating costs ($ 15,000) Resource allowance ($ 27,500) Designated amount expense ($ 71,000)
$ 11,500
Percentage Income Amount = $11,500 x 15% = $1,725
Termination Amount
Purchase price $14,000,000 Designated amount $0 Percentage income amount $0 Less option price ($ 75,000) Termination amount $13,925,000 Month 2—ending June 30,1985 Net Proceeds Net Cash Proceeds Proceeds $250,000 $0 Crown royalties ($ 60,000) ($60,000) ARTC $ 30,000 $30,000 Operating costs ($ 30,000) ($30,000) PGRT (Net of credits) ($ 5,000) ($ 5,000) $185,000 ($65,000) Previous net proceeds $ 92,500 Net proceeds $277,500 Designated Amount
1. 10.75 x $14,000,000 purchase price
$ 71,000 designated amount
(previous month end)
$ 1,725 percentage income amount
(previous month end)
$ 32,500 (— 1 X negative net cash proceeds
at start of month)
.896% x $14,105,225 $126,383
1. $126,383
plus
2. $ 71,000 Previous month end cumulative designated amount
$197,383
Designated amount at June 31, 1985 $197,383
Percentage Income Amount
Proceeds $ 25,000
Operating costs ($ 30,000)
Resource allowance ($ 55,000)
Designated amount expense ($126,383)
$ 38,617
Percentage income amount (month) $38,617 x 15% = $5,793
Cumulative percentage income amount $ 5,793 4- $1,725 = $7,518
Termination Amount Purchase price $14,000,000 Designated amount (at previous month end) $ 71,000 Percentage income amount (at previous month end) $ 1,725 Less option price ($ 75,000) Termination amount = $13,997,725