Highwood-Sarcee Oils Ltd. v. The Minister of National Revenue

HUDSON J.-This is an appeal from a judgment of the late President of the Exchequer Court (1), which dismissed with costs an appeal by the appellant against its assessment for income tax for the taxation year 1935. The appellant filed a return for the period in question showing a net loss, but the Minister adjusted the income and declared that the appellant had taxable income of $30,254.94 for the period in question. This amount was arrived at after making certain customary allowances and disallowing a sum of $74,011.28, the amount of investments written off by the appellant's return. The decision of the Minister was that the investments in shares of and advances to other companies and persons were not expenditures of the taxpayer wholly, exclusively and necessarily laid out or expended for the purpose of earning its income, but were in fact capital in their nature, specifically disallowed for income tax purposes under the provisions of section 6 of the Act.

The appellant company was incorporated by letters patent and given a wide range of powers, only two of which need be referred to. They are:

(a) 1. To search for and recover and win from the earth petroleum, natural gas, oil, salt, metals, minerals and mineral substances of all kinds, and to that end to explore, prospect, mine, quarry, bore, sink wells, construct works or otherwise proceed as may be necessary to produce, manufacture, purchase, acquire, refine, smelt, store, distribute, sell, dispose of and deal in petroleum, natural gas, oil, salt, chemicals, * * * (k) To purchase, underwrite, guarantee the principal and interest of, subscribe for and otherwise acquire and hold and vote upon the shares, debentures, debenture stock, *

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* of any company *

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* The appellant, by its income tax return, stated the nature of its business to be that of "oil operators".

The transactions giving rise to the profit were as stated by the learned President:

On July 20, 1933, a written agreement was entered into between T. 0. Renner, S. J. Davies and C. H. Snyder, therein called "the (1) [19421 Ex. C.R. 56; [1942] 3 DL.R. 38.

Operators", of the one part, and the appellant company, therein called "the Company", of the other part. This agreement may be summarized by saying that the Company made available to the Operators, upon terms and conditions, $60,000 for the purpose of drilling a well on a lease which the Operators had secured from the trustee of a bankrupt. The Company was to be paid back the said $60,000 out of production and to OP receive a 65 per cent. interest in the well, its production and equipment. There are clauses in the agreement providing for the payment of prior charges, the termination of the agreement, and so on, but these pro- Hudson J. visions are unimportant.

It is to be noted, however, that the Operators were to assign to the Company an undivided 65 per cent. interest in the lease.

This venture proved successful and a producing well resulted which became known as Highwood-Sarcee Well No. 1. The lease also provided for participation by the Operators and the Company in drilling further wells if desired.

On these facts the learned President held that the profit arising on this transaction was income.

The transactions giving rise to losses which the appellant claims the right to set off appeared in the balance sheet of the company as of June 30, 1935, as follows:

Investments and Advances written off- Pine Hill Petroleums Limited..............

56,511.28

Western Alberta Oils Limited..............

15,000.00

Sheldon Burden of Canada Limited..........

2,500.00

74,011.28 These transactions arose out of the purchase of shares in two other companies engaged in oil development and in loans to these companies or to persons connected with their operations. They were held by the learned President to be in the nature of capital investment and, for that reason, the claim to set off these losses was disallowed.

It appears from the evidence that the appellant did not carry on the business of buying and selling oil shares or oil properties. They acquired shares and properties but there is no record of their having sold any. The only reasonable inference from the method of conducting their business was that their purpose was to acquire these properties and to hold them with the hope that ultimately they might become producing wells, as was done by them in the case of the particular enterprise which resulted in profits. The real business of the company is, I think, aptly described in their return as "oil operators".

The argument pressed most strongly by Mr. Patterson is that the transactions in the case of the losses were essentially of the same character as those in the profitable transactions and that if the profits were taxable in the one, losses in the others might properly be set off. He con- 98965--21

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tended that the activities of the company were analogous to those of an insurance company which did marine, fire and life insurance and lost in one branch and made profits in the other, and it.was held that the business of all should be read as one for the purpose of ascertaining taxable income.

It could not, I think, on the facts be successfully contended that the moneys invested in these shares and the loans made were not in their nature capital investments, and the only point that has caused me some difficulty is whether or not this capital investment could be considered as in the nature of circulating capital and not fixed. The illustrations are those of manufacturers having purchased raw material and of merchants trading in goods which they got for resale, or loans made by a brewery company to its customers. In each of these cases capital moneys are used and yet losses were allowed.

In the present case the shares were not acquired to be turned over like a merchant's stock of goods, btit to be held with a view of future profit from development. The loans were not made for the purpose of furthering the day to day business of the company. For these reasons, I think the investments were in their nature of fixed and not of circulating capital.

The appeal should be dismissed with costs.

J.-On the facts of -this case, what the appellant seeks to deduct from its admitted income is a loss of capital.

That is prohibited by the provisions of section 6 (b) of the Income War Tax Act. The appeal should be dismissed with costs.

APPEAL by the plaintiff from the judgment of the Supreme Court of New Brunswick, Appeal Division (1), reversing (Richards J. dissenting in part) the judgment of LeBlanc J. given in favour of the plaintiff for damages for injuries suffered by him by reason of a collision between him and a motor car driven by the defendant who was passing, without having sounded horn, a standing motor vehicle from which the plaintiff had alighted and was proceeding to cross the road. The last-mentioned vehicle was a tractor to which a trailer, on which was a load of straw, was attached.

COURT.-We are all of the opinion that it was by the fault of both parties to the action that the plaintiff's damages were caused and that the liability to make good the damages should be apportioned, by virtue of the provisions of The Contributory Negligence Act of New Brunswick, equally between them.

We refrain from expressing any view upon the interpretation, or the application to the facts of this particular case, of sections 38 and 42 of The Motor Vehicle Act of New Brunswick which gave rise to considerable divergence of opinion among the judges in the Courts below. We rest our judgment upon the failure by both parties in the circumstances of the case to use reasonable care.

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