New Continental Oil Company of Canada Limited v. Her Majesty the Queen, [1977] CTC 293, 77 DTC 5202

Pratte, J:—This appeal raises three distinct issues related to the income tax payable by the appellant for the 1966 and 1967 taxation years. Those three issues, which were all decided against the appellant by the trial judge, are referred to in the pleadings under the following headings:

(1) The Bituminous Sands Leases;

(2) The Conjuring Creek Lease;

(3) The Wilkinson Sublease.

(1) The Bituminous Sands Leases:

The appellant is a company incorporated in Alberta; its principal business, at all material times, has been exploring and drilling for petroleum and natural gas. By an agreement dated December 31, 1964, the appellant and five other oil companies agreed to pool their rights under 9 Bituminous Sands Leases granted by Her Majesty the Queen in right of Alberta. The appellant thereby became the beneficial owner of an undivided 15% share or interest in those leases. By an agreement dated January 24, 1966, the appellant sold that 15% interest for a consideration of $368,832.16.* [1] The issue is whether the proceeds of that sale were properly included in the appellant’s income under subsection 83A(5b) of the Income Tax Act.

Subsection 83A(5b) reads as follows:

83A. (5b) Where a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal) is disposed of after April 10, 1962,

(a) by a corporation described in subsection (3b),

(b) by a corporation, other than a corporation described in subsection (3b), that was at the time of acquisition of such right, licence or privilege a corporation described in subsection (3b), or

(c) by an association, partnership or syndicate described in subsection (4),

any amount received by the corporation, association, partnership or syndicate as consideration for the disposition thereof shall be included in computing its income for its fiscal period in which the amount was received unless the corporation, association, partnership or syndicate

(d) acquired such right, licence or privilege by inheritance or bequest, or

(e) acquired such right, licence or privilege before April 11, 1962 and disposed of it before November 9, 1962.

It must be read in conjunction with subsections (5d) and (5a) of section 83A:

(5d) Subsections (5b) and (50) do not apply to any disposition by an association, partnership or syndicate described in subsection (4) or a corporation or an individual of any right, licence or privilege described in subsection (5a) or (5b) unless such right, licence or privilege was acquired by the association, partnership, syndicate or corporation or individual, as the case may be, under an agreement, contract or arrangement described in subsection (5a).

(5a) Where an association, partnership or syndicate described in subsection (4) or a corporation or individual has, after April 10, 1962, acquired under an agreement or other contract or arrangement a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal) under which agreement, contract or arrangement there was not acquired any other right to, over or in respect of the land in respect of which such right, licence or privilege was so acquired except the right

(a) to explore for, drill for or take materials and substances (whether liquid or solid and whether hydrocarbons or not) produced in association with the petroleum, natural gas or other related hydrocarbon (except coal) or found in any water contained in an oil or gas reservoir, or

(b) to enter upon, use and occupy so much of the land as may be necessary for the purpose of exploiting such right, licence or privilege,

an amount paid in respect of the acquisition thereof shall, for the purposes of subsections (3b), (3d), (4a), (4b) and (40), be deemed to be a drilling or exploration expense on or in respect of exploring or drilling for petroleum or natural gas in Canada incurred at the time of such payment.

Subject to the appellant’s contention that only one part of the sum of $368,832.16 represented the consideration for the sale of its interest in the leases, it is common ground that the sum of $368,832.16 was properly included in computing the appellant’s income if it is found:

(a) that the appellant’s right, under the leases was, within the meaning of subsection 83A(5b), “a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal)’’, and

(b) that such a right was acquired under an arrangement described in subsection (5a) of section 83A.

Counsel for the appellant first argued that the rights of the lessees under the various Bituminous Sands Leases were not of the kind described in subsection 83A(5b); those leases, according to him, conferred the right to explore for, drill for or take bituminous sands, rather than ‘‘petroleum, natural gas or other related hydrocarbons”. He also submitted that such a right had not been acquired under an arrangement described in subsection (5a) since, in his view, the leases granted to the lessees, in addition to the rights already mentioned, other rights in respect of the land covered by the leases.

Those two arguments had been made at the trial. They were rejected by the trial judge. After due consideration, I have reached the conclusion that the decision of the trial judge to reject those two arguments was right and that I could not add anything useful to the reasons that he gave to support it.

At the hearing of the appeal, counsel for the appellant argued that there was another reason why the 15% interest of the appellant in the leases could not be said to have been acquired under an arrangement described in subsection (5a). The contract under which the 15% interest had been acquired by the appellant, said counsel, was the “pooling agreement’’ of December 31, 1964; the source of the appellant’s 15% interest was not, contrary to what everybody had assumed at the trial, the leases granted by the Province of Alberta. Counsel pointed out that a mere reading of the pooling agreement indicates that, in addition to an interest in the leases, the appellant acquired an interest in ‘‘all assets directly or indirectly relating to such interest”. It must therefore be concluded, following counsel, that the right to explore for and take bituminous sand under the leases had not been acquired by the appellant under an agreement of the kind described in subsection (5a).

To answer this argument, which, it must be observed, was put forward for the first time at the hearing of the appeal, it is sufficient to observe that there is nothing either in the pooling agreement or in the evidence from which one could infer that those other assets to which the agreement makes reference were rights “to, over or in respect of the land” covered by the leases.

I am therefore of the view that, on this first issue, the judgment of the trial judge should not be disturbed.

(2) The Conjuring Creek Lease and (3) The Wilkinson Sublease:

The last two issues are similar but arose from different factual situations. They can conveniently be dealt with together.

Under section 83A as it then stood, in order to fix the amount that the appellant was entitled to deduct for drilling and exploration expenses in computing its income for the 1966 and 1967 taxation years, it was necessary to determine whether certain sums, paid from 1949 to 1964, had to be included in the computation of the appellant’s income for those years. The sums in question are an amount of $50,000 paid in relation to the Conjuring Creek Lease and a sum of $64,058.74 paid in respect of the Wilkinson Lease. It is the appellant’s contention that the Minister of National Revenue was wrong in determining the amount that the appellant was entitled to deduct for drilling and exploration expenses in 1966 and 1967 on the basis that the two sums in question were to be included in the computation of the appellant’s income in the years preceding 1965.

The facts which gave rise to these two issues are correctly summarized by the trial judge [[1976] CTC 44 at 50-51]:

The Conjuring Creek Lease arose out of an option (Exhibit P-22), dated November 22, 1947 whereby the optionees, Michelberry and Naylor, obtained the right to enter into a petroleum and natural gas lease with a private owner, one Hamula. The option was exercised and a lease, dated December 20, 1947, was entered into. A copy of the lease is part of Exhibit P-24. The optionees had previously assigned the option to a trust company as trustee for a syndicate, whereof the optionees were the management committee. By another agreement (Exhibit P-24), dated December 20, the optionees, in their capacity as the management committee, sold the plaintiff the syndicate’s rights under the lease. The sale was in consideration of a drilling commitment and provided, in the event of success, for the equal division of the net proceeds of production between the syndicate and the plaintiff.

By a letter (Exhibit P-23), dated December 19, 1947 (I attach no significance to the discrepancy in dates) referring to the transactions previously described, the plaintiff undertook to pay the optionees, personally and not in their capacities as syndicate managers, the sum of $50,000 out of the plaintiff's 50% share of the net proceeds of production. By an assignment (Exhibit P-25), dated December 20, 1947, Michelberry and Naylor assigned one-fifth of the $50,000 to Hamula.

The full body of the letter (Exhibit P-23) follows:

“In consideration of the sum of $1.00 and other valuable consideration, the receipt whereof is hereby acknowledged, this Company agrees and undertakes that, out of the production of petroleum and natural gas to which this Company becomes entitled under agreements dated the 20th day of December, 1947, between yourselves on behalf of the Conjuring Creek Syndicate and this Company and yourselves and Prudential Trust Company Limited and the individual members of the Syndicate, you will be paid by this Company a total sum of $50,000.00, payable at the rate of 10% of the proceeds of net production of each well drilled by this Company on the NW /4 of Sec 7, TWP 50, Rge 26, West of the 4th Meridian pursuant to the said agreements until the full sum of $50,000.00 has been paid. You shall be paid promptly at the said rate as production proceeds are received but you shall not be entitled to any payment except out of production.”

The $50,000 was paid in accordance with the commitment during the years 1949 to 1952 inclusive. The full amount of the plaintiff’s 50% share of the net proceeds of production was recorded as income and the payments on account of the $50,000 were debited to a leasehold account at the same time as the corresponding revenue was recorded. It appears that, in fact, the plaintiff did not actually receive and pay out the $50,000; it was disbursed direct by the trust company in pursuance of the terms of an agreement (Exhibit P-26) made between the plaintiff and the trustee after a producing well had been drilled and an agreement for the sale of the production entered into by the plaintiff with a major oil company.

The relevant circumstances of the Wilkinson sublease are very similar. There the plaintiff acquired a lessee’s interest in certain petroleum and natural gas rights upon entering into a sub-lease (Exhibit P-28) with one Wilkinson, dated January 6, 1948. The plaintiff assumed Wilkinson’s drilling commitment on terms providing the equal division of the net production between the plaintiff and Wilkinson, himself a sublessee. Two persons, Schultz and Bell, had made the arrangements with Wilkinson and had also arranged for a major oil company to finance the drilling of the well needed to fulfil the drilling commitment. Also on January 6, 1948, the plaintiff entered into an agreement (Exhibit P-27) with Schultz and Bell. This agreement, after reciting that Schultz and Bell had arranged for the sub-lease to issue to the company and their arrangement of the financing, goes on to provide, in part, as follows:

“(1) As consideration for the acquisition of a Sub-lease of the petroleum and natural gas rights with respect to the said lands in the name of Continental . . . Continental covenants and agrees:

(b) In the event that production of oil is obtained in commercial quantities from the first well on the said lands (commercial quantities being defined to mean . . .) to pay to Schultz and Bell jointly the sum of $100,000.00 out of Continental’s 50% share of net production and at the rate of 10% of the net production in each well on the said lands until the said sum of $100,000.00 has been paid.’

Production in commercial quantities, as defined, was obtained from the first well and, again, an arrangement (Exhibit P-29) was made with a trust company to receive and disburse the proceeds from the sale of the production.

A total of $64,058.74 was paid to Schultz and Bell during the years 1949 to 1964 inclusive. The arrangement was then terminated. Again the money did not actually pass through the plaintiff’s hands but was included in its revenue and simultaneously debited to a leasehold account.

It is the appellant’s contention that the sums of $50,000 and $64,058.74 should not have been included in the computation of its income for the years in which those sums were paid. Those payments, it was submitted, were in the nature of production payments reserved, in the one case, by Michelberry et al, and, in the other case, by Schultz et al. Those sums, said counsel, were never received or paid by the appellant which had divested itself in favour of Michelberry et al and Schultz et al of its right to part of the production of the lands covered by the Conjuring Creek Lease and the Wilkinson Sublease.

In my view, this argument cannot stand. The record, as I read it, shows that the appellant, when it entered into contracts with Michelberry et al and Schultz et a/, assumed personal obligations towards these persons. I cannot interpret those contracts as effecting the alienation of part either of the production, or of the proceeds of the production, of the land covered by the leases. When the appellant entered into the trust agreements, it merely established mechanisms ensuring that the appellant’s income would be applied towards the satisfaction of its obligations.

For these reasons, rather than those given by the trial judge, I am of the view that the second and third issue raised by the appellant must also be resolved in favour of the respondent.

I would, therefore, dismiss this appeal with costs.

Smith, DJ (concurring):—I have had the advantage of reading the reasons for judgment of my brothers Pratte, J and Primrose, DJ in this appeal. On the issues arising out of the Conjuring Creek Lease and the Wilkinson Sublease they both came to the conclusion that the appeal should be dismissed. I agree with that conclusion.

On the issue arising out of the Bituminous Sands Leases, Pratte, J decided that the appeal should be dismissed, but Primrose, DJ concluded that it should succeed.

The answer to this issue turns on the meaning to be ascribed to certain provisions in the Income Tax Act of Canada and The Mines and Minerals Act of Alberta and regulations made thereunder, considered in relation to the terms of the nine Bituminous Sands leases granted by Alberta to the appellant and other companies severally, the rights under which leases had been pooled by an agreement by which the plaintiff acquired an undivided 15% interest in the nine leases and related assets in exchange for its 100% interest in the one lease (No 8) Originally granted to it.

The relevant provisions of The Income Tax Act are found in section 83A, more particularly in subsections (5a), (5b) and (5d) of that section. These provisions are concerned in part with tax liability. They read as follows:

EXPLORATION AND DRILLING RIGHTS; PAYMENTS DEDUCTIBLE

83A. (5a) Where an association, partnership or syndicate described in subsection (4) or a corporation or individual has, after April 10, 1962, acquired under an agreement or other contract or arrangement a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal) under which agreement, contract or arrangement there was not acquired any other right to, over or in respect of the land in respect of which such right, licence or privilege was so acquired except the right

(a) to explore for, drill for or take materials and substances (whether liquid or solid and whether hydrocarbons or not) produced in association with the petroleum, natural gas or other related hydrocarbons (except coal) or found in any water contained in an oil or gas reservoir, or

(b) to enter upon, use and occupy so much of the land as may be necessary for the purpose of exploiting such right, licence or privilege,

an amount paid in respect of the acquisition thereof shall, for the purposes of subsections (3b), (3d), (4a), (4b) and (4c), be deemed to be a drilling or exploration expense on or in respect of exploring or drilling for petroleum or natural gas in Canada incurred at the time of such payment.

RECEIPTS FOR EXPLORATION OR DRILLING RIGHTS INCLUDED IN INCOME

(Sb) Where a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal) is disposed of after April 10, 1962,

(a) by a corporation described in subsection (3b),

(b) by a corporation, other than a corporation described in subsection (3b), that was at the time of acquisition of such right, licence or privilege a corporation described in subsection (3b), or

(c) by an association, partnership or syndicate described in subsection (4),

any amount received by the corporation, association, partnership or syndicate as consideration for the disposition thereof shall be included in computing its income for its fiscal period in which the amount was received unless the corporation, association, partnership or syndicate

(d) acquired such right, licence or privilege by inheritance or bequest, or

(e) acquired such right, licence or privilege before April 11, 1962 and disposed of it before November 9, 1962.

(Sd) Subsections (5b) and (5c) do not apply to any disposition by an association, partnership or syndicate described in subsection (4) or a corporation or an individual of any right, licence or privilege described in subsections (5a) or (5b) unless such right, licence or privilege was acquired by the association, partnership, syndicate or corporation or individual, as the Case may be, under an agreement, contract or arrangement described in subsection (5a).

Prior to 1966 paragraph (a) of subsection (5a) had not been enacted. The critical words in subsection (5a) are those relating to an agreement, contract or arrangement under which there was acquired “a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal)” and the effect of paragraph (a) of the subsection. Subsection (5b) requires that where such a right, licence or privilege is disposed of, any amount received as consideration for the disposition shall be included as income in the fiscal year in which it was received. There are two exceptions to this rule, not relevant to the facts of this case. By subsection (5d), subsection (5b) does not apply to any disposition of such a right, licence or privilege unless it had been acquired under an agreement, contract or arrangements described in subsection (5a).

The nine leases had been granted by the Lieutenant Governor in Council under the provisions of The Mines and Minerals Act of Alberta. There were some minor differences in the provisions of the leases, but those of Lease No 8 were apparently accepted by the parties and the Court as satisfactory for the consideration of issues arising in this case.

By Lease No 8 the appellant lessee was granted “the exclusive right and privilege to win and work all beds and seams of bituminous sands” within the land described in the lease. The lease does not use the words “petroleum, natural gas or other related hydrocarbons” or any words other than “beds and seams of bituminous sands”.

Clause 2(1 )(c) of The Mines and Minerals Act of Alberta defines bituminous sands as follows, in part:

(c) “bituminous sands” means the oil sands and all other mineral substances in association therewith. . . .

This is, it seems, the only place in the Act where the word “oil” is used in connection with bituminous sands, but the definition clearly means that bituminous sands contain oil. I cannot think that the Minister, to whom, under subsection 304(1) any question as to the meaning of “bituminous sands” as given in clause 2(1)(c) is to be referred for final decision, would come to any other conclusion. In fact, as was stated in argument on this appeal the whole purpose of acquiring bituminous sands leases is to extract the oils and gases they contain in the hope of making a commercial profit from their sale.

Subsection 304(2) defines bituminous sands rights as follows:

304. (2) In this Part “bituminous sands rights” means

(a) the right to mine, quarry, work, remove, treat or process bituminous sands including the recovery of any products therefrom whether above or below the surface, and

(b) the right to dispose of bituminous sands and any products recovered therefrom.

I cite one other statutory provision. Paragraph 83(6)(a) of the Income Tax Act of Canada, 1966 enacts:

(a) “mine” does not include an oil well, gas well, brine well, sand pit, gravel pit, clay pit, shale pit or stone quarry (other than a deposit of oil shale or bituminous sand), . . .

It is clear that what was granted by Lease No 8 was a right to mine bituminous sands and to extract therefrom, first the bitumen and from it the oils, gases and anything else contained therein.

There is a weighty argument, as is clear from the reasons for judgment of my brother Primrose, for holding that what the appellant got under Lease No 8 was the right to carry on a mining operation, that Parliament in enacting section 83A of the Income Tax Act was considering only the traditional process of obtaining oil by well-drilling operations, and not of a mining operation, that the words “explore for, drill for or take’’ do not express with sufficient clarity an intention to include a mining operation within the purview of the section, that the words of a taxing statute must be interpreted strictly, and accordingly that section 83A does not apply in the context of this case.

On the other hand there are facts which in my opinion, arrived at after reviewing the facts and the law with great care and finally resolving some lingering doubts, tend even more strongly to the opposite conclusion. Obviously section 83A is designed to make gains realized on the sale of rights under oil leases subject to income tax. It seems most unlikely that Parliament would intend to tax such gains only when they arose out of a lease for an oil drilling operation and not where the lease contemplated another method of obtaining the oil.

Turning to the words in the Income Tax Act, subsection 83A(5b), “explore for, drill for or take’’, I consider the word “take’’ to be of great import. Its ordinary meaning is quite broad. It clearly means something other than “drill for’’, and to my mind there is no basis for applying the ejusdem generis rule. I see no solid reason for holding that this word should not be given its ordinary meaning, and in my view this ordinary meaning is broad enough to include a taking by means of a mining operation.

On the facts of this case, I have come to the conclusion that paragraph (a) of subsection (5a) of section 83A does not take the proceeds of the disposition by the appellant of its rights under Lease No 8 out of the income tax liability imposed by subsection (5a). Whatever is in the bituminous sands, if produced at all, is necessarily produced in association with the petroleum, natural gas or other related hydrocarbons extracted. All that is granted by the lease is the right to search for, mine, quarry, drill for, remove and treat the bituminous sands and recover products therefrom and dispose of the bituminous sands and products. The right of the lessee does not extend beyond what is found in the bituminous sands. These sands, in addition to sand and crude bitumen, from which oils and gases are produced contain, as stated by the learned trial judge, coke and sulphur, which are by-products of the production of gas and oil and thus clearly produced in association with the hydrocarbons. They may contain several other substances, such as gypsum, which remain after the sand, oils and gases have been removed. They too are not produced otherwise than in association with the oils and gases.

In the result, for reasons very similar to those expressed by the learned trial judge, Mahoney J, I have come to the conclusion that the assessment for income tax in respect of the Bituminous Sands Leases was in accordance with the Act. I would, therefore, dismiss the appeal on this item as well as the others, with costs.

Primrose, DJ (dissenting):—In this appeal there are three issues, referred to as (A) Bituminous Sands Leases; (B) Conjuring Creek Lease; (C) Wilkinson Sublease.

(A) Bituminous Sands Leases

The appellant owned a number of bituminous sand leases by virtue of leases from the Province of Alberta, which were similar in terms, and for the purposes of the appeal the one referred to is Lease No 8, dated March 12, 1956 (Exhibit P-15, vol Il, p 278).

It commences:

NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the rents and royalties hereinafter reserved and subject to the conditions, covenants, provisions, restrictions and stipulations hereinafter expressed and contained, Her Majesty doth grant unto the lessee in so far as the Crown has the right to grant the same the exclusive right and privilege to win and work all beds and seams of bituminous sands within and under the lands more particularly described as follows, namely:

All those parcels or tracts of land, situs to, lying, and being in the Ninetyseventh (97) Township, in the Eleventh (11) Range, West of the Fourth (4), Meridian, in the Province of Alberta, Canada, and being composed of:

Sections Ten (10) and Eleven (11) and that portion of the West half of Section Twelve (12) lying North and West of the left bank of the Athabasca River all of the said Township;

By an agreement dated December 31, 1964 (P-10, vol Il, p 163) the appellant reserved 15%, the remaining interests going to Canadian Fina Oil Limited 28.365, Pacific Petroleums Limited 26.258, Calumet 14.588, Murphy Oil Company Limited 8.914, Delhi 6.875 for the sum of $400,000 of which $31,167.84 represented its share of the deposit. The sum of $368,832.16 represented the proceeds of sale of its interest in the leases.

By a Notice of Reassessment for the appellant’s 1966 taxation year, the respondent as represented by the Minister of National Revenue, hereinafter called the Minister, included in its income the sale proceeds of its interest in the said Bituminous Sands Leases, the sum of $368,832.16.

The Minister treated the sum of $368,832.16 as an amount received for the disposition of a “right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal)”, within subsection (5b) of section 83A of the Income Tax Act, on the basis that the leases and the appellant’s interest therein constituted a ‘right, licence or privilege’’ acquired by the appellant under an “agreement, contract or arrangement’’ described in subsection (5a) of section 83A, and assessed the said sum as taxable income. The learned trial judge held that the Minister was right in so doing.

The appellant also argues that of the consideration in the Bituminous Sands Leases $140,000 of it was allocated to exploration costs, geophysical work, etc which increased the value of the “project property”; described in Exhibit 10, vol Il, p 165; that there was something more than just the right to take petroleum contained in the agreement P-10 and that a portion of it, ie $140,000, should not be taxable even if section 83A of the Income Tax Act applies. It was pointed out by the respondent that this was not an issue in the trial and was not raised in the pleadings and the evidence as to it is less than satisfactory.

The relevant portions of section 83A of the Income Tax Act in effect in 1966 were as follows:

EXPLORATION AND DRILLING RIGHTS; PAYMENTS DEDUCTIBLE

83A. (5a) Where an association, partnership or syndicate described in subsection (4) or a corporation or individual has, after April 10, 1962 acquired under an agreement or other contract or arrangement a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal) under which agreement, contract or arrangement there was not acquired any other right to, over or in respect of the land in respect of which such right, licence or privilege was so acquired except the right

(a) to explore for, drill for or take materials and substances (whether liquid or solid and whether hydrocarbons or not) produced in association with the petroleum, natural gas or other related hydrocarbons (except coal) or found in any water contained in an oil or gas reservoir, or

(b) to enter upon, use and occupy so much of the land as may be necessary for the purpose of exploiting such right, licence or privilege,

an amount paid in respect of the acquisition thereof shall, for the purposes of subsections (3b), (3d), (4a), (4b) and (4c), be deemed to be a drilling or exploration expense on or in respect of exploring or drilling for petroleum or natural gas in Canada incurred at the time of such payment.

RECEIPTS FOR EXPLORATION OR DRILLING RIGHTS INCLUDED IN INCOME

(Sb) Where a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal) is disposed of after April 10, 1962,

(a) by a corporation described in subsection (3b),

(b) by a corporation, other than a corporation described in subsection (3b), that was at the time of acquisition of such right, licence or privilege a corporation described in subsection (3b), or

(c) by an association, partnership or syndicate described in subsection (4),

any amount received by the corporation, association, partnership or syndicate as consideration for the disposition thereof shall be included in computing its income for its fiscal period in which the amount was received unless the corporation, association, partnership or syndicate

(d) acquired such right, licence or privilege by inheritance or bequest, or

(e) acquired such right, licence or privilege before April 11, 1962 and disposed of it before November 9, 1962.

(5d) Subsections (5b) and (5c) do not apply to any disposition by an association, partnership or syndicate described in subsection (4) or a corporation or an individual of any right, licence or privilege described in subsection (5a) or (5b) unless such right, licence or privilege was acquired by the association, partnership, syndicate or corporation or individual, as the case may be, under an agreement, contract or arrangement described in subsection (5a).

(5e) For the purposes of subsections (5b) and (So),

(a) where an association, partnership or syndicate described in subsection (4) or a corporation or an individual has disposed of any interest in land that includes a right licence or privilege described in subsection (5a) that was acquired under an agreement, contract or arrangement described in that subsection the proceeds of disposition of such interest shall be deemed to be proceeds of disposition of the right, licence or privilege;

and

(b) where an association, partnership or syndicate described in subsection (4) or a corporation or an individual has acquired a right, licence or privilege described in subsection (5a) under an agreement, contract or arrangement described in that subsection and subsequently disposes of any interest

(i) in such right, licence or privilege, or

(ii) in the production of wells situated on the land to which such right, licence or privilege relates,

the proceeds of disposition of such interest shall be deemed to be proceeds of disposition of the right, licence or privilege.

The relevant portions of section 83A in effect in 1964-65 were:

EXPLORATION AND DRILLING RIGHTS; PAYMENTS DEDUCTIBLE

83A. (5a) Where an association, partnership or syndicate described in subsection (4) or a corporation or individual has, after April 10, 1962, acquired under an agreement or other contract or arrangement a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal) under which agreement, contract or arrangement there was not acquired any other right to, over or in respect of the land in respect of which such right, licence or privilege was so acquired except the right to enter upon, use and occupy so much of the land as may be necessary for the purpose of exploiting such right, licence or privilege, an amount paid in respect of the acquisition thereof shall, for the purpose of subsections (3b), (3d), (4a), (4b) and (4c), be deemed to be a drilling or exploration expense on or in respect of exploring or drilling for petroleum or natural gas in Canada incurred at the time of such payment.

RECEIPTS FOR EXPLORATION AND DRILLING RIGHTS INCLUDED IN INCOME

(5b) Where a right, licence or privilege to explore for, drill for or take in Canada petroleum, natural gas or other related hydrocarbons (except coal) is disposed of by a corporation described in subsection (3b) or an association, partnership or syndicate described in subsection (4) after April 10, 1962, any amount received by the corporation, association, partnership or syndicate as consideration for the disposition thereof shall be included in computing its income for its fiscal period in which the amount was received unless the corporation, association, partnership or syndicate

(a) acquired such right, licence or privilege by inheritance or bequest, or

(b) acquired such right, licence or privilege before April 11, 1962 and disposed of it before November 9, 1962.

The leases cover portions of the Athabasca tar sands in Alberta. The appellant argues that a Bituminous Sands Lease is a mining lease, and is different in nature from a petroleum and natural gas lease, to which section 83A is applicable. The Lease No 8, vol Il, p 279 recites:

WHEREAS under and by virtue of The Mines and Minerals Act, being chapter 66 of the Statutes of Alberta, 1949 Lieutenant Governor in Council is empowered to make regulations governing disposition by lease; license or permit of bituminous sands rights; and

WHEREAS in exercise of the above recited power by order of the Lieutenant Governor in Council dated the 14th day of December, 1955, and numbered OC 1600-55, regulations were made governing disposition of bituminous sands rights the property of the Crown, a copy of which regulations is hereto annexed; and

WHEREAS the lessee having applied for a lease of bituminous sands rights in the lands hereinafter described, the Minister has granted such application under the provisions of The Mines and Minerals Act and the said regulations upon the terms and conditions herein contained.

It is clear from the evidence of Mr Brusset (transcript pp 59-62 and affidavit vol I, p 116) that a bituminous lease operation involves:

1. mining the sands;

2. extracting the crude bitumen; and

3. processing the crude bitumen to obtain synthetic crude oil.

This perhaps is not entirely accurate as it might be said to involve:

1. removing the overburden;

2. taking out the ore (ie sand and bitumen);

3. extracting the bitumen from the sand; and

4. processing the bitumen for the net result namely, crude oil.

According to the evidence, there is nothing produced in association with the petroleum or the crude bitumen, as in some petroleum and natural gas leases, eg where substantial amounts of sulphur are found and produced in association with the petroleum. Here, the lessee simply takes the sand containing the bitumen, from which the crude bitumen is extracted, and the sand then becomes “gaspillage” or waste. Consequently, how can it be said that this lease is within subsection (5a) of section 83A of the Income Tax Act? Unless the lease falls within that section, subsection (5b) has no application and the proceeds of disposition are not taxable as income under this section.

In reading the definitions of bituminous sands in the Alberta statutes and regulations that are set out in the Appeal Books, one reads such expressions as: “bituminous sands” in The Mines and Minerals Act, RSA 1955, c 204, s 304(a) [sic] which was later substituted by 1957, c 51, clause 2(a):

2. Section 2, subsection (1) is amended

(a) by striking out clause (c) and substituting the following:

“(c) ‘bituminous sands’ means the oil sands and all other mineral substances in association therewith being within townships eighty-four to one hundred and four inclusive in ranges four to eighteen inclusive, west of the fourth meridian and occurring in the McMurray formation, being the Stratigraphic formation lying above the upper Devonian carbonate sediments and below the Clearwater formation.”

Section 35 reads as follows:

35. Section 304 is struck out and the following substituted:

“304. (1) If any question arises as to the meaning of bituminous sands given in clause (c) of subsection (1) of section 2, the question shall be referred to the Minister whose decision thereon is final.

(2) In the Part ‘bituminous sands rights’ means

(a) the right to mine, quarry, work, remove, treat or process bituminous sands including the recovery of any products therefrom whether above or below the surface, and

(b) the right to dispose of bituminous sands and any products recovered therefrom.”

In The Mines and Minerals Act, 1962, SA 1962, c 49, clause 2(m), minerals are defined as:

(m) “minerals” means all naturally occurring minerals, and without restricting the generality of the foregoing, includes

(i) gold, silver, uranium, platinum, pitchblende, radium, precious stones, copper, iron, tin, zinc, asbestos, salts, sulphur, petroleum, oil, asphalt, bituminous sands, oil sands, natural gas, coal, andydrite, barite, bauxite, bentonite, diatomite, dolomite, epsomite, granite, gypsum, limestone, marble, mica, mirabilite, potash, quartz rock, rock phosphate, sanstone, serpentine, shale, slate, talc, thenardite, trona, volcanic ash, sand, gravel, clay and marl, but

(ii) does not include

(A) sand and gravel that belong to the owner of the surface of land under The Sand and Gravel Act,

(B) clay and marl that belong to the owner of the surface of land under The Clay and Marl Act, or

(C) peat on the surface of land and peat obtained by stripping off the overburden, excavating from the surface, or otherwise recovered by surface operations;

A provision to be found in subsection 83(6) of the Income Tax Act, 1966 reads as follows:

(a) “mine” does not include an oil well, gas well, brine well, sand pit, gravel pit, clay pit, shale pit or stone quarry (other than a deposit of oil shale or bituminous sand), . . .

This language is rather significant and does indicate a differentiation between an oil well and the deposits of oil shale or bituminous sand, which supports the appellant’s contention that bituminous sand should be treated as a mine.

After considerable argument as to relevance and counsel agreeing that the Court might give it such weight if any as the Court considered proper, a report to the Lieutenant Governor in Council in the matter of an application by certain companies under Part VIII of The Oil and Gas Conservation Act, published in December 1974 by the Energy Resources Conservation Board, was put in as Exhibit P-34. Such a report was required as a condition precedent to a development scheme relating to some of the Bituminous Sands Leases in question here. While it is a very lengthy report, and without accepting any particular aspect as evidence, it can be said that the report illustrates the manner in which bituminous sands leases are developed of which there was other evidence at the trial, ie excavators for overburden removal, and mining of the oil sand or body, stripping and stockpiling along the pit perimeters for later use as reclamation material, temporary disposal of overburden, etc. The mining system is described, using drag lines and multiple belt conveyors to transport the ore to the processing plant. There is other evidence given in the verbal testimony also that at the extraction plant primary separation is carried out by using a hot water process and so on; finally, the extracted bitumen being upgraded and treated. This report supports the verbal testimony that the operation of extracting the oil from the bituminous sands is strictly a mining operation and a complicated one, requiring a great deal of advance preparation and expense for plant equipment in order eventually over a period of years to have a plant that will produce conventional and synthetic crude oil. It seems incontrovertible that such an operation as described in the report and in the verbal testimony is something far different from a petroleum and natural gas lease.

In interpreting a section such as 83A of the Income Tax Act it has been held many times that

a statute imposing a tax should always be strictly construed . . . , in case of doubt, the tax should not be levied.

Foss Lumber Co v The King (1912), 3 WWR 110; 47 SCR 130; 8 DLR 437, reversing 14 Ex CR 53. A section in a taxing statute has to be given a strict verbal construction—a mode of construction not merely permissible, but made imperative by authorities. Ex parte Lewin (1885), 11 SCR 484, reversing 23 NBR 591. That is not to say that the canons of construction to be applied to it should be different from those applicable to any other Act. In all cases the true intent of the Act must be ascertained. It has been held that in interpreting a taxing statute the courts should not stretch the language used therein to bring within its scope those objects sought to be taxed. Re Burrard Dry Dock Co (1955), 17 WWR 92 (BC).

In Cornwall v Ottawa & New York Railway (1915), 52 SCR 466, Chief Justice Duff held:

It is a long settled rule that a given subject is not to be held to be a subject of taxation unless the intention to include it among the subjects of taxation is expressed in “clear and unambiguous language’’.

The appellant points out that the leases grant the right to search for, mine, quarry, drill for, remove and treat or process bituminous sands, and recover products therefrom, and the right to dispose of products recovered therefrom, and says that bituminous sands are not related hydrocarbons.

Section 83A, subsection (5a) was amended in 1965 as above but the appellant says the purpose was to ensure that conventional petroleum and natural gas leases which grant the right to produce substances such as sulphur, in association with the petroleum, are covered by section 83A, ie that the amendment does not have the effect of extending the subsection to include the Bituminous Sands Leases.

Having regard to the differentiation between the usual petroleum and natural gas leases and the leases in question here, the Court is of the view that the language of section 83A is not sufficiently clear to embrace the Bituminous Sands Leases in question in this appeal.

(B) Conjuring Creek Lease; (C) Wilkinson Sublease

The other two issues in the appeal, namely the Conjuring Creek Lease and the Wilkinson Sublease are in essence the same. The facts in the Conjuring Creek Lease are that by an option agreement dated November 22, 1947 (Exhibit P-22, vol 3, p 382) one Hamula gave to Messrs Naylor and Michelberry an option to acquire an oil and gas lease on the Northwest 7-50-26-W4th. The option was exercised and a P & NG Lease dated December 20, 1947, was granted by Hamula to Naylor and Michelberry. The latter entered into an agreement with the appellant whereby the appellant acquired the right to drill on the lands. Under that agreement, the net proceeds of production were to be shared 50% to the appellant and 50% to Michelberry and Naylor.

By letter dated December 19, 1947 (Exhibit P-23, vol III, p 291) the appellant agreed with Michelberry and Naylor to pay them a sum of $50,000 at the rate of 10% of the proceeds of net production of each well drilled on the lands which payment was to be only out of production. Michelberry and Naylor assigned 1/5 of the production payment to Hamula but that is not in issue in this appeal.

The Prudential Trust Company became trustee for distribution of the net proceeds of production and in due course distributed proceeds out of which Michelberry and Naylor and Hamula eventually got $50,000. The appellant originally showed this amount in its books as income but later reversed the entry and charged it to lease acquisition costs and now insists that it is not income. The fact that it was originally charged as income and later changed to lease acquisition costs is not a determining factor. The issue is to determine whether in fact it is income as the respondent claims. The appellant did not receive the actual sum of $50,000 but this fact of itself simply means that instead of being paid to the company and then to Michelberry and Naylor it was handled through a trustee. The Minister included the sum of $50,000 in the appellant’s income for previous years, the effect of which was to reduce the drilling and exploration expense remaining available to the appellant, by the same amount, and this determination was confirmed by the learned trial judge.

It is clear that the 12 /2% royalty to an original lessor, in this case (Hamula), never becomes part of the proceeds of the lease, and he is entitled to it forever, ie it is not income in the hands of a lessee. Any subsequent assignment or agreement, such as the one Michelberry and Naylor entered into with the appellant, reserving a fraction of the proceeds of gross production, is income. The Calgary and Edmonton Corporation Ltd v MNR, [1955] Ex CR 213; [1955] CTC 161; 55 DTC 1099.

The statement of the Lord Chancellor in the case of Mersey Docks and Harbour Board v Lucas (1883-90), 2 TC 25 (HL), adopted in the case of Salada Foods Limited v The Queen, [1974] CTC 201; 74 DTC 6171, is applicable where it is stated at page 31:

The mode of the application makes no difference whatever to the question of what is profit and what is gain.

The application of part of the production proceeds to satisfy the contractual obligation of the appellant does not change the character of those proceeds and as indicated earlier the intervention of the trust company as distributor is artificial and does nothing more than facilitate the payment out of the proceeds, quite a usual procedure in cases of this kind. Consequently, although the proceeds as a whole did not pass through the appellant’s hands the proceeds nevertheless bear the character of income.

Applying these principles the amounts in issue in both the Conjuring Creek and Wilkinson Leases is income.

In the net result the appellant’s interest in the Bituminous Sands Leases in the sum of $368,832.16 should not be included in the taxpayer’s income for its 1966 taxation year. However, the disputed $50,000 in the Conjuring Creek Lease and the $64,058.74 in the Wilkinson Sublease, are to be included in the taxpayer’s income for its 1966 taxation year. The appeal is therefore allowed in respect to the Bituminous Sands Leases, and the appellant will have its costs.