T-1311-72
M.W.A. Gas and Oil Limited (Plaintiff)
v.
Minister of National Revenue (Defendant)
Trial Division, Cattanach J.—Calgary, Novem-
ber 12 and 13, 1973; January 21, 1974.
Income tax—Deductions—Expenses of business in oil and
gas production—Construction business of corporation suc
ceeded by oil and gas business in same taxation year—
Whether oil business principal business—Corporation held
entitled to deduction—Income Tax Act, s. 83A(3bXa).
The plaintiff corporation abandoned its construction busi
ness in March 1968. A hiatus of activity ensued, during
which the corporation wound up its construction operation.
Activity was resumed in October 1968 with the entry of the
corporation into the oil and gas field with subsequent expen
diture on exploration of $995,000. In 1969, the corporation
effected a change of name to that appearing in the style of
cause.
Held, allowing the appeal, the corporation's construction
business was succeeded by the oil and gas business as the
"principal business" in the taxation year 1968. The corpora
tion was entitled to the deduction of moneys expended
under section 83A(3b)(a) of the Income Tax Act.
Sorbara v. M.N.R. [1965] 1 Ex.C.R. 191; American
Metal Company of Canada v. M.N.R. [1952] C.T.C.
302 and M.N.R. v. Consolidated Mogul Mines Limited
68 DTC 5284, considered.
INCOME tax appeal.
COUNSEL:
J. G. McDonald, Q.C. and D. C. Nathanson
for plaintiff.
F. Dubrule, Q.C. and F. Fryers for
defendant.
SOLICITORS:
McDonald & Hayden, Toronto, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
CATTANACH J.—This in an appeal from an
assessment to income tax by the Minister for
the plaintiff's taxation year ending October 31,
1968.
The issue in this appeal and the rival conten
tions with respect to the issue resolved them
selves into a very narrow compass.
The issue is whether the principal business of
the plaintiff in its 1968 taxation year, was pro
duction, refining or marketing of petroleum,
petroleum products or natural gas or exploring
or drilling for petroleum or natural gas within
the meaning of section 83A(3b)(a) of the Income
Tax Act.
If that is the case then the plaintiff, in accord
ance with formulae outlined in section 83A(3b),
may deduct in computing its income under Part
I of the Act, in effect the aggregate of its drilling
and exploration expenses incurred in the year to
the extent that those expenses were not previ
ously deducted.
The amount of those expenses total $955,000.
Expenses in the amount of $55,000 were
incurred by the plaintiff for exploring and drill
ing for oil in October 1968 and the plaintiff
acquired oil and gas exploration rights at a cost
of $900,000 also in October 1968.
It is admitted by the Minister that the expen
diture of $900,000 by the plaintiff was for the
acquisition of exploration and drilling rights
within the meaning of section 83A(5a) and as
such are deemed by section 83A(5a) to be a
drilling and exploration expense for the pur
poses of section 83A(3b).
The pertinent portion of section 83A(3b)
reads as follows:
83A. (3b) A corporation whose principal business is
(a) production, refining or marketing of petroleum,
petroleum products or natural gas, or exploring or drilling
for petroleum or natural gas,
may deduct, in computing its income under this Part for a
taxation year, the lesser of ... .
The formulae for determining the amounts
deductible are then outlined in paragraphs (f)
and (g) of subsection (3b) of section 83A but
there is no dispute between the parties as to the
deductibility of a total amount of $955,000 pro
vided the plaintiff qualifies as a corporation
whose principal business is as outlined in para
graph (a) of subsection (3b) of section 83A
reproduced above.
The contention of the plaintiff is that the
principal business of the plaintiff was, in the
taxation year in question, as described in para
graph (a) whereas the Minister contends that its
principal business was otherwise. Therein lies
the dispute between the parties.
The plaintiff was incorporated pursuant to the
laws of the Province of Ontario by letters patent
dated May 18, 1966 under the name of McDou-
gall Walbridge Aldinger (Ontario) Limited for
the purpose of carrying on the business of build
ers and general contractors. The company was
formed by the Walbridge, Aldinger Company of
Detroit, Michigan, and by W. A. McDougall
Ltd. of London, Ontario each of whom held
50% of the issued shares of the capital stock of
the plaintiff.
In effect the plaintiff was a combination of
the resources of the Detroit based and London
based companies. The Detroit based company
had done work for the Ford Motor Company
and the London based company had construc
tion equipment in that area.
The plaintiff company so formed was the
successful bidder for the construction of an
automobile assembly plant for Ford Motor
Company of Canada Limited (hereinafter
referred to as Ford) at St. Thomas, Ontario.
The original contract with Ford was for the
foundation work, footings, caissons and con
crete work. If I recall the evidence correctly the
plaintiff's bid was in the neighbourhood of
$5,000,000. However over a period of 14
months from the beginning of construction in
1966 the contract went through some 338
change orders or amendments so that the plain
tiff was continuously engaged in the completion
of the project which was the construction of the
Ford assembly plant and turning it over to Ford
in an operable condition. Again it is my recollec
tion that the total cost of the project was
approximately $27,850,000. The contract was
referred to as a turn-key contract.
In October and November 1967 there were
about 200 employees of the plaintiff all of
whom were iron workers doing the final work of
completing the conveyor assembly in the plant.
Ford went into production before Christmas
1967. Mr. McDougall bought an automobile
which came off the assembly line in December
1967.
There were no employees of the plaintiff
working on the site as at February 1, 1968.
There were no sub-trades on the site except
about 20 men doing the final landscaping.
The job superintendent left the job in Novem-
ber 1967 and returned to the employ of W. A.
McDougall Ltd. on projects underway in East
ern Canada.
Mr. McDougall testified that the work was
completed on February 1, 1968 subject to
cleaning up exercises in which he estimated that
some 200 man-days were expended by
employees of the plaintiff and 400 man-days by
employees of the sub-trades.
It is the contention of the plaintiff that the
project was completed in February 1968.
On the other hand counsel for the Minister
contended that the construction business of the
plaintiff continued throughout the plaintiff's
financial year ending October 31, 1968 and into
the next ensuing financial year.
He based that contention by analogy to
remarks made in Sorbara v. M.N.R.' where it
was said at page 199:
... In my view, the business of acquiring land for disposi
tion at a profit includes all operations essential to the
successful completion of the project, including not only sale
or other disposition, but collection of the proceeds of
disposition.
He then pointed out that there were approxi
mately 20 work-order amendments, the invoices
[1965] 1 Ex.C.R. 191.
for which were dated from April 1968 to August
1968.
Mr. McDougall explained that the work had
been done and the officers of the plaintiff were
negotiating with Ford as to the amounts payable
under the work-order amendments. When this
was settled the invoices issued. The officers of
the plaintiff had a meeting each month with
Ford to negotiate the amounts payable.
The job superintendent had been paid a bonus
of $67,000. He left the job in the fall of 1967.
In the July previous he had been paid $15,000.
The balance of $52,000 was paid to him August
1969 which was well into the next fiscal period
of the plaintiff.
The financial statement of the plaintiff for the
year ending October 31, 1968 disclosed as an
asset an amount of $378,000 due from Ford.
The final invoice to Ford in the amount of
$318,000 was sent on October 23, 1968, seven
days before the fiscal year end and was paid in
November 1968.
The explanation of the discrepancy between
the amounts of $378,000 and $318,000 was that
the negotiations with Ford resulted in the lesser
amount.
The plaintiff was originally incorporated to
construct one project, namely, the Ford motor
assembly plant. Therefore the construction busi
ness of the plaintiff would come to an end of its
own weight on the completion of that project.
The evidence is that the plant was completed
before March 1, 1968 and all that remained to
be done was to negotiate with Ford and collect
the amounts determined to be payable.
On completion of the Ford plant the Wal-
bridge Aldinger Company of Detroit wanted out
of the plaintiff company. This separation was
arranged. The profits resulting from the con
struction of the Ford plant were divided. W. A.
McDougall Ltd. became the sole beneficial
shareholder of the plaintiff and there remained
in the plaintiff liquid assets in the approximate
amount of $1,273,000 being the appropriate
share of the profits from the construction
business.
The plaintiff therefore sought other forms of
business activity. After investigation it was
decided to enter the oil and gas business.
By supplementary letters patent dated Octo-
ber 16, 1968 the objects authorizing the plaintiff
to engage in the construction business were
deleted and objects authorizing it to engage in
an oil and gas business were substituted
therefor.
The plaintiff obtained an extra provincial
licence from the Province of Alberta in October
1968 authorizing it to carry on business in that
Province.
By supplementary letters patent dated April
30, 1969 the corporate name of the plaintiff was
changed from McDougall Walbridge Aldinger
(Ontario) Limited to M.W.A. Gas and Oil Lim
ited which name appears in the style of cause.
As previously recited the plaintiff incurred oil
and gas drilling and exploration expenses in the
amount of $55,000 and acquired oil and gas
exploration and drilling rights at a cost of $900,-
000 both of which amounts were paid by the
plaintiff by cheque in October 1968.
In its 1968 taxation year the plaintiff received
revenue from its oil and gas business in the
amount of $8,124 and in its 1969, 1970 and
1971 financial years it received revenue in the
approximate amount of $350,000 in each year.
From these figures I observe that the plaintiff
recouped its expenses in three years.
The contention of the Minister, as I under
stood it, is that the language of section 83A(3b)
reading, "A corporation whose principal busi
ness is", of necessity means that a corporation
can have only one principal business in a taxa
tion year and that no particular period of time
within the taxation year is of more paramount
importance than any other period.
Assuming the Minister's contention to be cor
rect, it follows that I must decide which of the
two businesses, namely, the construction busi
ness and the business of exploring and drilling
for gas and oil carried on by the plaintiff in its
1968 taxation year, was its principal business.
In contradistinction the position taken by the
plaintiff is that until March 1, 1968 the plaintiff
was exclusively in the business of construction.
Since that was its sole business at that time it
was its principal business.
However it was the plaintiff's contention that
the active construction business ended on
March 1, 1968 on the completion of the project
and from that time forward the plaintiff was
dormant until October 1968 when it actively
embarked on an oil and gas business.
The crux of the argument on behalf of the
plaintiff, as I understood it, was that a corpora
tion can have two principal businesses within a
taxation year provided there is an hiatus
between the conclusion of one business and the
inception of another.
In American Metal Company of Canada Ltd.
v. M.N.R. 2 Cameron 'J. had occasion to consider
which of two businesses being carried on con
currently was a corporation's "chief" business.
The pertinent words of the section then in effect
were "a corporation whose chief business is
that of mining or exploring for minerals is en
titled to deduct from income" expenses incurred
for prospecting, exploration and by develop
ment in the taxation year.
He said at page 306:
"Chief business" is not defined in either of the Acts and
the phrase, so far as I am aware, has not been the subject of
judicial interpretation. In my view it is a question of fact to
be determined by an examination and comparison of all the
facts concerning each of the various types of business in
which the company is engaged.
2 [1952] C.T.C. 302.
In M.N.R. v. Mogul Mines Limited 3 Spence J.
speaking for the Supreme Court of Canada,
quoted and approved the foregoing statement by
Cameron J. and applied the test therein set
forth.
He noted that the statute then under consider
ation contained no definition of "principal busi
ness" although "business" is defined in section
139(1)(e) in a manner not relevant to the ques
tion under review.
The same circumstance is applicable in the
present instance. There is no distinction conse
quent upon the use of the adjective "principal"
in place of the adjective "chief". In their
respective contexts the words are synonymous.
I therefore revert to the contention of the
Minister, without purporting to decide the
matter, that a corporation can have only one
principal business in a taxation year.
As I have said before it is implicit in the
submission that a corporation can have only one
principal business that the question to be decid
ed, as one of fact, is which of the plaintiff's
businesses in its 1968 taxation year was its
principal business.
In this case the only business of the plaintiff
following its incorporation in 1966 was the con
struction of the Ford assembly plant at St.
Thomas, Ontario. The plaintiff was incorporated
for that project only. There is ample justifica
tion for that conclusion. The Detroit based com
pany had a long association with and was
favourably known to Ford. The London based
company had experience in the construction
business in that area. The Detroit based com
pany became a shareholder in the plaintiff for
the construction of this particular plant only.
This is borne out by the subsequent event that
upon the completion of the plant it severed its
connection with the plaintiff.
3 68 DTC 5284.
The plant, in an operable state, was com
pleted in December 1967. Ford motor cars came
off the assembly line in that month. All that
remained to be done was in the nature of a
cleaning up exercise, the landscaping and the
installation of external iron railings. This work
was completed by March 1, 1968. As of that
date the plaintiff had no more employees on the
job, its job superintendent had left the site and
the plaintiff's employ in November 1967. All
employees of the sub-trades had left the site
prior to that date.
In short the physical construction of the plant
was completed as of that date. All that remained
to be done was for the officers of the plaintiff to
settle with Ford the compensation for the work
done pursuant to change orders and accept the
payment of those amounts when determined.
The actual work covered thereby had been
undertaken and completed by the plaintiff prior
to March 1, 1968.
I do not accept the testimony of Mr. McDou-
gall that the plaintiff then became dormant and
remained dormant until October 1968 when it
became engaged in exploring and drilling for oil
and gas. The plaintiff performed numerous cor
porate acts in the interval. However I do accept
as a fact that the plaintiff ceased to be engaged
actively in the construction business as of that
date. To all intents and purposes the plaintiff's
active engagement in the construction business
ended as of that date never to be revived again
nor was it the intention of the plaintiff from its
inception to engage in the construction business
on completion of this particular Ford plant.
What the plaintiff did after that date was direct
ed merely to winding up its construction
business.
It is quite true that the revenue that the plain
tiff received in its 1968 taxation year from the
completed construction work exceeded the
revenue from the oil and gas business in which
the plaintiff engaged in October 1968 and so too
the profit from the construction business
received by the plaintiff in its 1968 taxation
year far exceeded the profit from the oil and gas
business in that year which was a negative
quantity.
However, Mr. Justice Cameron said in the
American Metal (supra) case that the compara
tive income received by a corporation from two
businesses carried on by it is an important ele
ment to be considered in determining which is
the chief business but that is not the only matter
to be considered and is not necessarily the
determining factor.
On the other hand the plaintiff abandoned its
construction business in the 1968 taxation year
and became engaged in the oil and gas business
in that year.
In that year supplementary letters patent were
obtained authorizing the plaintiff to carry on an
oil and gas business to the exclusion of a con
struction business and it exercised those
changed objects in 1968.
From that time forward the sole business of
the plaintiff was that of exploring and drilling
for oil and gas and in its 1969, 1970, 1971 and
1972 financial years it derived substantial
income from that business. Because that was
the sole business from October 1968 on, it
follows as from that date it was the plaintiff's
principal business.
The plaintiff did not have employees, as dis
tinct from officers, engaged in the oil and gas
business. It operated through the facilities of
Voyager Petroleum Limited.
Again in the American Metal (supra) case
Cameron J. pointed out that the number of
employees in the respective businesses is an
element in determining which of the two busi
nesses is the chief business but that it is not
necessarily the determining factor.
It was preordained from the inception of the
plaintiff that its construction business would
end on the completion of the Ford project. That
end was readily foreseeable in the early part of
the plaintiff's 1968 taxation year from the
beginning of that year. What the plaintiff was
doing from November 1967 to March 1968 of
its 1968 taxation year was drawing its construc
tion business to its inevitable end. In the initial
four months of that financial year the plaintiff's
construction business was on the wane until its
ultimate demise on March 1, 1968.
There then followed a period of inactivity, but
for passive corporate acts, until the oil and gas
business was conceived and actively engaged in
in October 1968.
In the plaintiff's 1968 taxation year its con
struction business was in its death throes while
the oil and gas business was born and in its
dynamic infancy reaching maturity in the suc
ceeding year.
In my opinion these facts establish that while
the construction business had been the plain
tiff's principal business that business was
superseded by the oil and gas business as the
plaintiff's principal business in its 1968 taxation
year.
For the foregoing reasons I conclude, as a
question of fact, that the plaintiff's principal
business was that of exploring or drilling for
petroleum or natural gas, and so falls precisely
within the qualification for the deduction of
exploring and drilling expenses incurred by it in
computing its income for its 1968 taxation year
in accordance with section 83A(3b).
Because of the conclusion I have reached, it
becomes unnecessary for me to decide between
the rival contentions on behalf of the parties,
which were, on the one hand, that section
83A(3b) prescribes that a corporation can have
only one principal business in a taxation year
and, on the other hand, that a corporation can
have two principal businesses in one taxation
year, within the meaning of section 83A(3b),
provided that there is an hiatus between the
conclusion of one business and the inception of
another.
The appeal is, therefore, allowed with costs to
the plaintiff.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.