Imperial Oil Limited v. Minister of National Revenue, [1972] CTC 455, 72 DTC 6390

Collier, J:—The appellant appeals against an assessment in respect to its 1963 income. The respondent, for that year, added to the appellant’s income the sum of $7,459,055.25, the alleged profit realized on the transfer of certain natural gas storage leases to Tecumseh Gas Storage Limited. The appellant contends the transaction in question was a capital gain; the respondent says the sum in question was realized in the course of the appellant’s business, or alternatively was the result of an adventure in the nature of trade, and therefore income within the meaning of the Income Tax Act, RSC 1952, c 148 and amendments.

As has been said many times, these cases depend on their particular facts,* [1] and accordingly it is necessary to review the evidence in some detail.

The appellant was incorporated by federal letters patent in 1880 and has grown over the years into a fully integrated petroleum and chemical operation. It explores and develops new fields in respect to petroleum and natural gas, builds pipelines, constructs and operates refineries and numerous bulk plants. It is presently the largest company of its kind in Canada and one of the largest in the world. My reasons for recounting some of this corporate background are twofold: (a) generally speaking, the evidence before me indicates a history of acquiring assets such as petroleum and natural gas leases, retaining them and developing them to produce fuel and thus income, rather than trading in such assets and (b) the question of intention in respect to the acquisition of the gas storage leases in question here and the disposition of some of them is of prime importance.

Around 1945 the appellant began to explore for petroleum and natural gas in southwestern Ontario. The usual methods were employed, that is, obtaining leases from private landowners giving the appellant the right to drill and extract any petroleum or natural gas found. If oil or natural gas is discovered, the leases remain in force so long as production is maintained. The exploration was successful and oil and natural gas were discovered in a number of areas (pools), including those material to this appeal: Kimball-Colinville, Bickford, Sombra, Seckerton, Corunna. The leases obtained did not give any storage rights. In those years the theory of bringing natural gas from elsewhere and using depleted pools as storage reservoirs was unknown or in its infancy.

In the 1950’s gas storage as described was developed in the State of Michigan and the appellant in 1954 gave consideration to the obtaining of gas storage leases from the lessors from whom it held petroleum and natural gas leases in southwestern Ontario. Some attempts were made, but after three or four months the scheme was dropped. Mr Colpitts, the former manager of the appellant’s eastern production division, testified there was no foreseeable market for gas storage facilities, and the company did not make attractive offers to the lessors. I conclude from the evidence of Mr Colpitts and Mr Twaites (now the appellant’s chairman and chief executive officer), and from an examination of certain company minutes of 1954 filed as exhibits, that the appellant was at that time really undecided as to whether or not it wanted to get into the gas storage business.

In 1957 the appellant was approached by Union Gas Company of Canada Limited and an attractive offer of 2.2 million dollars was made by that company to purchase what was referred to in evidence as the “Payne Pool”. This pool was located in the same general area as the pools I have previously referred to. These were producing natural gas wells. There were twenty leases involved in this sale, seven of which were storage leases as well as petroleum and natural gas leases. The evidence is that no separate price or calculation was made with respect to the storage leases, and I accept the evidence of Mr Colpitts that, so far as the appellant was concerned, this was, for all practical purposes, the sale of producing wells.* [2]

The evidence of Mr Colpitts and Mr Twaites is that occasionally in Ontario and in western Canada other petroleum and natural gas leases have been sold but for specific business reasons, and not as a matter of course. While no detailed figures were given, it is apparent these sales were a small fraction of the overall number, and usually the sales were at a book value loss.

In 1960 the appellant decided to get into the gas storage business on its own. At hearings before a federal royal commission in 1957 and 1958 the five pools referred to earlier in this judgment were named as potential gas storage areas. The trans-Canada pipeline had been completed in 1958 and there was an increasing demand for natural gas, with its concomitant of storage facilities. In my view of the evidence, the appellant by 1960 had concluded that the storage of gas for utilities was practically and economically warranted, and it decided to use the pools it had for that purpose. The company, in the same year, obtained storage leases from approximately 85% of its petroleum and natural gas lessors in the areas in question. The evidence is that the majority of these leases were new, although a few were renegotiations of leases obtained in earlier years.

The next step was to have the pools designated as gas storage areas under section 28(a) of the Ontario Energy Board Act 1960, and an application was made accordingly on December 22, 1960. Counsel for the respondent, in argument, contended that all this was a speculative venture and that the appellant had no firm resolve to get into the gas storage business, nor any assurance it could obtain the required designation from the Ontario Energy Board. The evidence against these contentions is clear and compelling. The appellant had in 1959 rejected an offer from Union Gas to buy one of the largest pools, and I shall later refer to two subsequent offers in respect to these pools. The Energy Board held a hearing in respect to the appellant’s application in March of 1961. The application was not opposed and decision was reserved. The evidence is clear that the appellant did not anticipate any difficulty or delay in respect to this application. This is confirmed by the evidence of Mr Lee, then an official of The Consumers’ Gas Company (hereafter “Consumers”). In May of 1961, Consumers made an offer to purchase the pools, but this was rejected outright by the appellant who told Consumers it proposed to go into the storage business for itself. Trans-Canada Pipe Lines Limited made a similar proposal during this period (the date is not clear) but that offer too was rejected for the same reason.

Somewhere in this period of time (again the date is not clear) the Ontario government had set up a committee (the Langford Committee) to study and report on the matter of underground gas storage and in October of 1961 the appellant, along with others, made submissions. The Langford Committee released its report in March of 1962 and among its recommendations was one to the effect that only Ontario incorporated companies should be allowed to own or operate storage facilities. On April 11, 1962 the Minister of Energy Resources made a policy statement in the Legislature that only companies holding a provincial charter would be allowed to Operate storage reservoirs in Ontario. The appellant unsuccessfully protested this decision. Following this, Consumers again made an offer to purchase the pools, but again this was rejected. The Energy Board finally handed down its decision on December 13, 1962 designating the pools as gas storage areas.

A good deal of evidence was given as to the various schemes proposed and considered as to how the appellant could develop these gas storage areas and still comply with the requirement they must be owned and operated by an Ontario company. I do not think it necessary to review that evidence except to say it was ultimately decided to bring Consumers in on a partnership basis. This led to the incorporation in Ontario of Tecumseh Gas Storage Limited in which the appellant and Consumers are equal partners. I also do not think it necessary to go into the details of the financial arrangements except to say the appellant and Consumers each put up a specified amount of capital, the appellant transferred the leases, and was paid $8,200,000 by Tecumseh.

The respondent contends this transfer or sale was done in the ordinary course of business of the appellant, or alternatively was an adventure in the nature of trade. A strong submission was made on behalf of the respondent that the appellant always had from the time it acquired these storage leases, a secondary intent, at the very least, to turn them to a profit if the opportunity arose. It was contended that if the Ontario Energy Board had refused to designate the pools as gas storage areas, then the only alternatives open to the appellant were expropriation by the province, or sale to some third person. I think that contention is unsound. There were other alternatives: the course the appellant in fact took was one and, while it incidentally involved a sale, it was primarily designed to accomplish the appellant’s prime purpose which was to utilize these pools in the gas storage business.

I was referred to a number of cases by counsel for both parties including the leading decisions of the Supreme Court of Canada.* [3] In the Regal Heights case (supra) the primary intention of the partners in the acquisition of certain properties was to establish a shopping centre, but on the evidence it also appeared their intention was to sell at a profit if they were unable to carry out their primary aim. The primary aim was frustrated when the promoters could not interest a department store in the shopping centre, the scheme was dropped and the lands sold at a profit. The gain was held to be taxable. That case, and others dealing with the sale of real property, usually involve frustration of an avowed primary objective. In the case before me, to adopt Mr Vineberg’s phrase, there has been fulfilment of the avowed purpose for acquiring these storage leases in 1960, although not fulfilment in the way initially envisaged by the appellant.

I return again to the question of secondary or alternative intent and the respondent’s submission. In my view, it is a matter of common sense to say that any public company, with the interests of its shareholders properly before it, must have at least vaguely in its corporate mind, at the time it acquires capital assets, the possibility of selling those assets if economic considerations demand it. I do not believe, however, that the possibility in the corporate thinking I have referred to necessarily makes any ultimate profit automatically taxable as income. Noel, J (now Associate Chief Justice) said in Racine et al v MNR, [1965] CTC 150 at 159; 65 DTC 5098 at 5103:* [4]

In examining this question whether the appellants had, at the time of the purchase, what has sometimes been called a “secondary intention” of reselling the commercial enterprise if circumstances made that desirable, it it important to consider what this idea involves. It is not, in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it, for every person buying a house for his family, a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment, that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this is not what must be understood by a “secondary intention” if one wants to utilize this term.

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

With that test in mind and considering all the evidence, I am satisfied the acquisition in 1960 and the scheme for development of these storage leases was carried out with the prime intention of using them in the business of gas storage and any possibility or thought of resale was not an operating motivation in the acquisition of the leases. In my view, these leases were acquired with the intention of holding them and operating them as a revenue-earning investment to the exclusion of any intention at the time of acquisition to dispose of them at a profit. Finally, the evidence, in my opinion, is clearly against the contention the appellant was in the business of buying and selling leases, whether petroleum and natural gas leases or storage leases.

The appeal is allowed and the assessment referred back to the Minister accordingly. The appellant is entitled to its costs.